Construction industry experts are expecting the cost of doing business in this sector to increase by three percent in 2018. When you are talking about a $1 trillion or more industry, a three percent increase represents a lot of dollars. That is why it is essential for contractors to become familiar with the basics of equipment financing so that they can make the best possible decisions when it comes to buying heavy equipment. The construction industry runs on heavy equipment, but construction company owners do not want to allow these costs to run them out of business.
Buying in Cash
No matter what size a construction company may be, it is possible that the company could conceivably buy its next piece of heavy equipment with cash upfront. This sounds like a great idea, but you may want to rethink this concept as it is not as advantageous as you may think.
In the business world, cash flow is king. If you have a good cash flow, you can get financing for just about anything you need. In the construction industry, the need for equipment and materials is very dynamic. If you tie up hundreds of thousands of dollars into a single piece of equipment, then that would weaken your cash flow position and affect every other aspect of your business. The smart choice is to finance your purchase, but you have to figure out which type of financing is best for you.
Buying with Funding
Instead of doing the traditional comparison of buying with funding versus leasing, it would be best to discuss each option separately and allow you to draw your own conclusions. Buying with funding is just another way of saying that you purchase your equipment with a capital loan, and there are many good reasons why you should consider a heavy equipment loan.
If your company has good credit, then you can usually finance 100 percent of the cost of your equipment with a loan that has a generous repayment schedule and a low interest rate. There are tax benefits to these types of loans that you cannot get when you purchase your equipment with cash, and you will significantly strengthen your company’s credit standing when you finish paying off the loan.
Why would a construction company lease a piece of heavy equipment instead of buying it with funding? Leasing also carries tax benefits, and it often does not demand the kind of down payment a loan would require. When you lease, the company you are leasing from is usually responsible for making repairs that occur due to normal wear and tear.
A lease can also be very flexible. You can get a lease that starts out with larger payments in the beginning and then tapers off to smaller payments over time. If you are leasing a piece of equipment just as a project is starting, then this allows you to reduce your lease payments when the project is over, and your cash flow is not as strong.
You can also get a lease that starts out with smaller payments and works its way up to larger payments. If you are leasing equipment in anticipation of a project starting, but there is going to be a ramp-up period, then this sort of lease is going to be ideal for your company and your bottom line.
You should consult with your company’s accounting firm before making a final decision. If you know you will have a long-term need for a piece of equipment, then buying with funding makes a lot of sense. If the equipment will only be needed for a relatively short period of time, then a lease allows you to trade that piece of equipment in for something else when the project is over.
You can find out more about construction financing and other important topics at PDH Contractors. You can also browse courses by state to renew your construction license or expand your business by getting licensed in other construction fields.