In the construction industry, equipment and machinery are essentially your business.
Without the proper equipment, it would be nearly impossible to get jobs done with efficiency, craft and care.
For all types of construction, the goal is to complete projects in accordance with plans and specifications, on time, within budget and at the lowest possible cost. When starting a construction business, it is crucial to have the appropriate equipment to execute all types of construction projects. As in all businesses, it is important that the equipment pay for itself to earn a significant profit. In other words, the cost to own and operate the equipment should be less than what the contractor charges for its use.
The cost of construction equipment, unfortunately, is one of the single largest investments for a contractor. Costs can run from $15,000 to more than $100,000 depending on the type and amount of equipment needed. Each time the company acquires a new piece of equipment, the cost is being financed even if paid for in cash. But there is a solution to reduce equipment costs and minimize overhead through equipment leasing.
When Louie Ramirez started his construction company, HDM Construction in Commerce City, CO, he had very little money and minimal equipment. When HDM found itself in need of purchasing new machinery, instead of shopping around and shelling out a major portion of the company's profits, Ramirez dialed a number off a flier he received in the mail from an equipment leasing firm.
"That little phone call ended up saving me about $100,000 a year," Ramirez said. "There aren't many ways to conserve expenses in this industry, especially being as small as we are. Leasing my equipment and machinery allows me to free up more capital for operational expenses, which I wasn't able to do as much before."
Through certain equipment leasing plans, a contractor may select from leasing options that allow the company to trade in equipment for the latest upgrades. This is ideal in the construction business where there are frequent advancements made to equipment requiring contractors to constantly update.
"Short term leases accommodate what we need as trends change," Ramirez commented. "We are able to swap our lease and get updated equipment right away through the lease purchase programs."
How It Works
The business owner and leasing company form an agreement to finance equipment the business needs. The leasing company (the lessor) allows the construction company (the lessee) to lease the equipment and pay for it monthly over a fixed time period of typically two to five years. Construction business owners and business owners of all kinds can be a lessee. The lessee determines the type of lease that best suits their needs, which usually depends on whether they want to own the equipment at the end of the lease term or if they want the flexibility of being able to "return" the equipment to obtain a more up-to-date replacement.
Leasing companies secure the funds to pay for the equipment from a funding source, such as a bank. It is the job of the leasing company to ensure that all necessary paperwork is completed, coordinate with the equipment vendor to ensure that payment and delivery are in sync with the schedule of the construction company, and follow up on any issues that may arise during the process.
The lease contract can be for a single piece of equipment, or it may be written as a master lease that covers all equipment leased by the lessee. The business owner has a non-cancelable obligation to pay the lease fees and maintenance costs relating to the equipment during the lease term. The lessee also bears the risk of equipment loss or damage, and insurance is therefore required of the lessee.
Business owners find the equipment needed, at the vendor of their choice, and directly negotiate the purchase price, close the deal and assign the purchase order to the lessor. The lessor then completes the lease and provides the funds directly to the vendor to purchase the equipment for the business owner.
Equipment leasing companies generally help the construction company access financing quickly by using non-recourse (non-collateralized) debt. Because of their relationships with financial institutions, most leasing firms use a process that quickly establishes the credit ability of the construction business owner with no financials required in leases under $100,000. This allows for some of the fastest turnaround in the industry-from hours to just days. Equipment leasing requires zero down payment and 100 percent of the equipment cost may be financed. Many equipment leasing companies even allow sales tax, delivery, installation and training to be added into the lease. Additionally, a lease doesn't tie up the business owner's personal credit to qualify and, in most cases, offers substantial tax benefits. Equipment leasing has benefited thousands of businesses and helped many construction business owners like HDM run a successful and profitable business with no headaches.
"Like most small business owners, I like to keep my business far away from debt," Ramirez commented. "Equipment leasing is a great avenue for construction business owners because it allows you to pay for your equipment as you're using it, and we don't have to shell out tons of cash every time a piece of equipment breaks."
Types of Leases
There are several types of leases to choose from depending on the terms that best suit the business' needs. First, there is the Fair Market Value Lease, an excellent option for business owners expecting a decrease in the value of their leased equipment. The lease agreement provides three options when the term of the equipment lease ends: purchase the leased equipment at fair market value, renew the equipment lease or return the equipment.
Another lease financing option is the Dollar Buy Out Lease. With this option, at the end of your lease term, a business owner may "buy" the equipment for just a $1. This is an appealing selection for businesses with equipment that will not lose value when keeping equipment after the lease ends.
Many equipment leasing companies also offer commercial leases for large equipment purchases over $100,000. With this particular lease, many banks will include equipment leases on a business' available credit and reduce the credit line limits accordingly. Some equipment leasing companies, however, have special arrangements so that equipment leases won't affect a company's available bank credit. The construction industry is one that can benefit immensely from equipment leasing, especially when starting out in the business. Even though construction is primarily a labor-based business, start-up and one-time fees can make it difficult for a contractor to build a profitable business.
"If we had leased sooner, we would have had a lot more operating capital, which could have helped to bring in more business," Ramirez concluded. "My company is in a much better situation now. As a business owner in this industry, I would not recommend purchasing equipment any other way."
Construction Business Owner, September 2007
