Nobody likes homework — especially homework that involves math. But before you purchase a piece of equipment that costs five or six figures, it pays (literally) to spend a few hours doing some homework to crunch the numbers and figure out what makes the most sense for your business.
Rather than taking a blanket approach to the question of whether to buy or lease equipment, Todd Roorda, sales manager with Vermeer, recommends that tree care companies take the time to research all of their options. For example, a manufacturer may be offering a special lease deal or interest rate on particular models of equipment in order to boost sales during certain times of the year. “No matter when you’re buying, just ask questions to find out what your options are,” says Roorda. “And that’s more than just asking your dealer or the financing company you normally work with. You may just want to drop in at your local bank, even if you don’t bank with them. It may be worth an easy phone call to possibly save a fair amount of money.”
When it comes to setting up a loan or lease for equipment, “there’s a variety of different avenues you can go down, whether you work with your local bank, or a manufacturer, dealer, financial company,” says Roorda.
As a manufacturer, Vermeer works exclusively with one lending company (DLL Group), which buyers can choose to work through if they choose. While leases are an option, Roorda says they’re not particularly popular at the moment. “To be honest, we don’t see a lot of leasing in the tree care industry,” he explains. “But there are obviously advantages to leasing: most notably cash flow. If you lease a machine, your payment is typically going to be lower than if you go through the acquisition mode to get it, and that’s obviously going to free up more capital to do other things, whether to make payroll or make other acquisitions or whatever.”
These days, the two most popular options are either traditional loans or “dollar buyout” leases, reports Gary Evonsion, senior vice president of national accounts with Crest Capital, a company that specializes in financing equipment and vehicles for small and medium-size businesses, including those in the tree care industry. “The dollar buyout lease (in which, at the end of the lease term, the end-user pays $1 and takes ownership of the equipment free and clear of all liens) and a loan are very similar; for a small and medium-sized business, they are virtually the same thing,” he explains.
Evonsion says that a major driver behind the popularity of these approaches to acquiring equipment (rather than more traditional leases) is the Section 179 tax law. What it says in basic terms is that, depending on how you structure the deal, if the end-user basically has ownership of that equipment, they – if they are a small or medium-size company — can take the full cost of that equipment against their income the year that put that equipment in place, Evonsion explains. “So if they are a profitable company… that generates tax savings for them.”
Buying the equipment with a loan obviously meets the requirements for Section 179 tax benefits to apply, and so do some leases, such as dollar buyout leases, if they are considered “capital leases” rather than “operating leases” (where the financing company still has ownership of the equipment), he states. For comparison sake, a typical car lease, where the vehicle is turned back in after three years, would be considered an operating lease.
In addition to the tax implications, another consideration in whether buying or leasing equipment makes the most sense is simply how that equipment is going to be used and treated. “If a company is going to take care of the equipment, and it’s a long-term play for them and they are profitable, then they probably want to do a purchase or a dollar buyout lease,” says Evonsion. On the other hand, if there’s a lot of technology involved with the equipment and that technology is rapidly evolving, it may make more sense to go with a more traditional operating lease, he adds. That way, when something new comes along in a few years, they can simply turn the equipment in and upgrade.
The decision of whether to buy a piece of equipment upfront or to finance it (whether through a lease or loan) sometimes comes down to how much cash a business has on hand, but sometimes it has more to do with individual business strategy.
Evonsion says many of the companies that Crest Capital works with don’t have the funds needed to buy a particular piece of equipment, “but they see the value in being the long-term owner of [that] equipment, so they opt for either a dollar buyout lease or equipment financing/loan arrangement.” In other cases, the company does have the cash to buy a piece of equipment upfront but “they want to keep some dry powder, so instead of using their money they will use our money to go out and purchase equipment,” he adds.
Similarly, while financial calculations can help answer a lot of questions about whether it makes more sense for a specific company to buy or lease a specific piece of equipment, there’s another consideration that usually is involved that has less to do with numbers and more to do with emotions. “There’s a lot of tree care contractors who like things that are tangible — they like to know ‘that equipment is mine,’ which I totally understand,” says Roorda. For these individuals, the idea of leasing may seem foreign. And, adds Roorda, confusing. “What happens at the end of a lease can be a question for them.” He says there are a variety of possible steps at the end of a lease: the user can buy the equipment, lease it again or walk away from it. Educating contractors about these different options can make them more comfortable with leasing, Roorda says.
Particularly those just starting in the tree care business may not be fully aware how leases and loans work, what financial information they’ll need to provide, and whether they could even get approved. “They may steer away from the whole process, when in fact they may very well have everything they need to be accepted,” says Roorda.
Companies just starting out may feel more comfortable saving funds and buying equipment in cash when they have enough money. But, from a business standpoint, having all the equipment you need, and having it be reliable, can help make a company more productive than just scraping by on what can be purchased upfront. Put together a monthly budget early on, Roorda advises new companies. Whether that means buying or leasing equipment, getting what you need and knowing what it will cost you each month can help grow a company a lot faster than cutting corners and saving up money, he says.
It’s true that start-up businesses can sometimes find it challenging to secure financing. Crest Capital, for example, requires a company to have been in business for at least two years in order to qualify for financing. For those companies, it may be necessary to get by with older equipment that can be purchased with cash and to try save as much as possible. But companies that have been in business for a few years may be able to work more efficiently and grow their businesses faster with new (or high-quality pre-owned) equipment, and that may require some sort of financing. Evonsion says businesses sometimes wait too long to explore these options, perhaps believing they won’t qualify for financing. Waiting may result not only in inefficiencies as older equipment breaks down, it might allow time for competition to move in, Evonsion adds.
“If you’ve been in business and have a proven track record, we can sometimes get you the next truck or piece of equipment that can help you create more revenue and build your business even more,” says Evonsion.
“We’re looking for people that have started to build their businesses, and now see opportunities in the market that they can take advantage of. Maybe they’ve landed a new contract or are looking to get a new crew going…or they need different types of equipment to help things run a little more efficiently or a little better.”
Some businesses have already identified the equipment they want to buy when they come to a financing company or bank. “They know the specific piece they want, they know who the vendors are, they know the price, and they’ll come to us,” says Evonsion. “Others know that they need a particular type of equipment, but haven’t yet identified a vendor – they may be working with several. And they haven’t decided on whether they want to go new or used.”
In the first scenario, a company can fill out a credit application with the specifics included; in the second case, they can get pre-approved up to a certain amount to allow them to shop confidently and comfortably. Getting pre-approved makes it easier to work with vendors and allows buyers “to focus more on getting what they need” rather than worrying about other considerations when choosing a piece of equipment, says Evonsion. Once the buyer has been approved for a certain amount, the company works with the buyer to work out the terms of the deal, for example deciding whether the term of the loan will be 24, 36, 48 or 60 months, etc. “We also discuss whether they want to do a lease or a purchase,” he explains.
At least with Crest Capital, there is no difference between a lease and loan in terms of how much money is required to be put down, as Crest Capital will finance up to 100 percent of the equipment cost. Individual lenders may vary in their down payment requirements. “You can get a little more aggressive (lower) payments with an operating lease, but at the end, whoever is financing that equipment still owns it,” says Evonsion.
There’s no question that all of the different options and approaches available to buying and leasing equipment can be confusing. “The biggest thing is to do what’s right for your business,” advises Roorda. Whether it’s a monthly payment you’re looking for to stay within a budget, or what’s best in the long-term, “it’s definitely worth a few minutes or hours to investigate,” he says. In other words, there’s no substitute for doing your homework.
Pro Tip: Seasonal Payments Pro Tip
When purchasing equipment, one and something that financing company Crest Capital offers to certain borrowers regardless of whether a loan or a lease is involved, is seasonal payments. “For example, in the tree care business, if you’re busy for three-quarters of the year, depending on where you are in the country, and one-quarter of the year it’s slow, we can modify the payments so that they’re lower for those three months,” says Gary Evonsion, senior vice president of national accounts for Crest Capital. “It doesn’t have to be set up so that you have the same payment every month.” Also be sure to find out if the rate being offered for a loan or lease is fixed or variable, he advises.
Editor’s note: The topics discussed here are intended to provide an overview of some of the factors that go into purchasing and leasing equipment. Talk to an accountant or a reputable lender to get more details on the tax implications and details about how specific loans and leases work, in order to decide what makes the most sense for your business.