Lease to Own: A More Strategic Approach to Equipment Spending

July 25, 2018 | Mark Scardigli

Construction Companies Are Taking Ownership of Their Success

While construction industry spending hit an all-time high in 2017—and is expected to continue its climb throughout 2018 and beyond—new tariffs are not only squeezing profit margins, but also increasing the price of steel and aluminum parts and heavy equipment that contractors rely on. To stay competitive, companies are forced to be more strategic with their equipment spend in order to maximize their budgets and enhance their overall business performance. Enter the lease-to-own equipment financing option.

Lease-to-own equipment financing combines the strategic advantages of lease financing, such as no down payments and affordable monthly payments, with the benefits of owning construction equipment outright. In response to a recent nationwide survey, 63% of construction companies said they would consider a lease-to-own option rather than paying the 5-15% increase in rental fees. In addition to the cost savings and convenience that comes with ownership, contractors who own their own equipment are often looked upon more favorably and tend to rise to the top when it comes to contract bids.

Benefits of Lease-to-Own Versus Renting Equipment

  • Lower monthly payments. Monthly lease payments are usually much lower than rental options. (See example below.)
  • Return on investment. Unlike rentals, where businesses don’t own an asset after the term is up, lease-to-own provides the option to keep the equipment or sell it to recapture some of their investment.
  • Convenience. Equipment is always available and on-hand allowing contractors to complete their jobs on time and on budget, or even offer the equipment to subcontractors for a fee.
  • Peace of mind. Warranties and some maintenance can be rolled into the lease to help ensure the equipment is running properly during the lease term—and the cost still remains cheaper than renting.
  • A competitive edge. The lower cost of a lease-to-own (or eventual ownership) option allows contractors to price themselves more competitively over others who must increase their bids to cover high rental overheads.
  • Tax savings. Owning equipment (which includes lease-to-own) provides a favorable tax advantage under IRS Section 179—allowing businesses to deduct up to $1 million for a single piece of equipment in the first year (per 2017 guidelines).
  • End-of-term options. Depending on the contract and terms of a lease, businesses may return the equipment, purchase it, or extend the lease. All of these options provide cost savings over long-term rentals.

How much can businesses save?

Opting for a lease-to-own agreement rather than renting, especially for long-term or multiple projects, can provide considerable cost savings for construction businesses. Based on the example below, leasing a 40-foot boom rather than renting one delivers significant cost savings starting at a period of 24 months—and after just three years can save a business more than $28,000—in addition to allowing them to keep the equipment. For companies that use certain pieces of equipment more than 60% of the time, it’s a smart business decision.

Chart of cost comparison for lease to own vs renting equipment for 24, 36, 48 and 60 months

SOURCE: Equipment Leasing & Finance Foundation

As with any financial decision, contractors should consult with their accountant before entering an equipment agreement. They should also speak with representatives from equipment finance companies to provide information and thorough answers to any questions around lease-to-own financing to ensure they are getting the best deal and the best equipment for their needs.