One reason contractors like renting an articulated dump truck (ADT) for their projects is the ability to have short-term access to high-capacity, reliable machinery for moving materials in many types of terrain. Whether you’re moving dirt or aggregates in site development, road construction or any building project where mass excavation is required, an ADT can provide fast and efficient dumping.
However, ADTs can be some of the most expensive machines on a construction site if they’re not fully utilized. Many business owners find renting a machine more economical than purchasing if work is not consistent on a daily or weekly basis. During that rental term, however, you can quickly build equity that can be converted into a financing option toward ownership.
Put Equity to Work
Financing construction equipment is still a popular route to ownership because this equipment—unlike equipment in other industries—typically isn’t faced with obsolescence. If you’ve already identified future projects and resources that justify owning an ADT, you should consider several finance options. The three most commonly used types of financing in the industry include rent-to-purchase options, traditional loans and leasing. Equipment dealers are adept at structuring rent-to-purchase option agreements (RPO) that may be favorable for your business. In addition to reducing fleet costs and eliminating service, an RPO may represent an opportunity for owners to turn a short-term need into a long-term solution.
Manufacturers are also making attractive loan and leasing choices available for customers who would like to convert their current rental plan into ownership. Most offer below-market financing as low as 0 to 2.9 percent—rates that would not be available for you to secure through a conventional lender. At the same time, a growth trend is occurring in leasing as the economy slowly improves. This is an option that typically provides a lower monthly payment and may include a bundled extended warranty.
Choose Your Best Option
While the three most popular financing options provide different advantages and benefits for your operation, the most important factors to evaluate with each option are how long you plan to keep the machine, what target payment you require and whether you need flexibility to return the machine without further obligation to the lessor. The three most popular financing options are as follows:
- Rent-to-purchase option – If you’re hesitant to make a capital investment, an RPO may serve your short-term equipment needs. It can be structured to transfer a portion of a rental fee toward purchasing the machine, or you can return it at the end of the rental period. Although ADTs can be rented for a shorter term than loan or lease alternatives, the trade-off is a higher rental rate.
- Traditional loan – With less loan delinquency in the market, securing financing is much easier today than it was a few years ago. Loan approval rates by lending institutions, manufacturers and the Equipment Leasing & Finance Association are up overall. Loan rates—especially those offered by manufacturers—are relatively low right now, and lenders are more comfortable with longer terms than in past years. However, the most important aspects of a loan that you should evaluate are the term and the interest rate, as they’re the primary drivers of the loan payment.
Leasing – A hybrid between a rental and a purchase, leasing solutions have seen an uptick on the market. Leasing typically provides the lowest payment scenarios and the best hedge for potential declines in equipment values. Because leases are structured only for the use of an ADT during the lease term, they enable you to customize a financing program to meet your business’s cash flow issues, including budgeting and transaction and cyclical fluctuations.
Less flexible than a short-term rental, leases can be an appealing alternative if you don’t have an appetite for additional depreciation. Seasonal leases are still popular as they help to slot payments into a company’s busiest months and to avoid payments during the off-season. Additionally, leasing equipment has different tax implications from conventional forms of financing. In most cases, the entire lease payment can be deducted as a business expense during the course of the lease contract; however, you should confirm your situation with a tax professional to be sure.
Determine the Crossover
Regardless of which route makes the most sense, you must determine and monitor the crossover point at which you’ve built enough equity in an ADT through rental that you could effectively lower your payment by exercising your purchase option. For example, let’s imagine that you’re renting a 30-ton machine for six to 12 months at rates that typically range from $8,000 to $12,000 per month, depending on your location and arrangement. At the end of that term, you could have accumulated $50,000 to $150,000 in equity, which could represent more than 50 percent of the purchase price of a machine that likely has a good residual value. At this crossover point, what matters more than the acquisition cost of the machine is finding the right finance option that will help you convert to ownership with a monthly payment you can afford.
In fact, the sooner you can give a dealership representative an indication that you may be interested in converting rental arrangements to potential ownership, the better. If you wait until the end of the term, some organizations may not apply the full rental amount that you accumulated to a purchase deal.
As you consider ownership of an ADT, you’ve already made a smart choice by renting a unit first. Renting can help you better understand the performance of the machine, open up lines of communication with your equipment supplier and provide an opportunity to explore your purchase options. If you’ve put your business in a position to add a truck to your fleet, finding a finance option that will convert your valuable equity into ownership for long-term productivity has never been easier.
