|
|
Lease or buy?
1 Oct, 2009 By: Curt Harler Landscape ManagementEven as the economy starts to get back on an even keel, there are few landscape contractors with money to throw around. However, they still need to replace and update equipment. During a time when every nickel counts — and cash flow is king — contractors might wonder whether it's better to buy or lease new equipment.
 |
"It's never black and white," says Tom Dowd, manager of lease administration for John Deere Credit in Des Moines, IA. "There are no rules of thumb that can be used to determine whether a lease is applicable."
But there are several things to consider when making the lease versus purchase decision. Before you push the buttons on your calculator, determine whether the equipment you're thinking of leasing carries a high purchase option. The higher a purchase option, the more advantages a lease offers, Dowd says.
To make the decision more complicated, the definition of what a high-purchase option is varies, depending on the evaluated equipment. Determine whether the equipment will be used for short-term, incremental projects or to meet long-term basic needs.
Making monthly payments on seasonal equipment is helpful, says George Kinkead, president of Minneapolis-based Turfco.
"Instead of having big spikes, leasing can level the cash flow," Kinkead says. "The right answer on lease versus buy is to finance equipment until the point at which you have the cash to pay it off."
Each situation must be analyzed as a separate event.
"Leasing seems to make most sense when a landscaper is awarded a short-term contract and needs additional equipment to complete the job, but isn't certain there's a need for the equipment beyond the term of the contract," Dowd says. "Purchasing seems to make most sense when the customer plans to use the equipment for a long time."
 Are things different in today's economy? |
One successful strategy is to use the lease terms to spread the payments over a couple years, then buy the equipment and continue to use it.
Kinkead cautions against thinking about landscape equipment leasing on the same terms as a car lease, however.
"Capital, durable equipment, like renovation equipment, typically will last more than two or three years," he says. "It's a cash-flow question. Especially for a smaller operator, it's probably better not to write a check for the full cost of equipment. It's better to buy as the business grows and pay for equipment out of cash flow."
For low-hour users who take care of their machinery, it pays to keep the equipment after the lease ends.
"Any time you lease equipment, you need to know what you'll do with it at the end of the lease," Kinkead says.
Additionally, you (and your accountants) should know how you'll generate the revenue to buy a piece of equipment, and how much you're willing to pay in interest for the privilege of keeping the machine.
On the plus side, leasing allows a business to upgrade its equipment frequently. If nothing else, having new, modern, shiny equipment helps create a prestigious image. And on the more practical side, new equipment eliminates down time and lowers maintenance costs.
1 2 3
Please send any technical comments or questions to our webmaster.