The Right Equipment on Your Terms – A Buyer’s Guide on Whether to Purchase, Rent or Lease
With 2016 in full swing and the nation’s economic outlook in flux, oil and gas companies are starting to ask questions about how to match their equipment needs to their current jobs.
For most consumers, purchasing equipment outright has been the most widely assumed option. When purchasing equipment, you gain ownership of the asset and build equity. Though upfront costs are substantial, over the long haul, resale value and certain tax benefits, such as depreciation, could likely save you money. However, these days, those upfront costs are becoming more difficult for the average consumer to handle.
Redhead Equipment, one of Saskatchewan’s largest heavy equipment dealers of agricultural, construction, and truck and trailer products, has seen this shift firsthand. Melissa Sparrowhawk, Financial Services Manager explains, “For companies who are using their equipment year-round, who have cash or lines of credit available to them, purchasing still remains a very viable option. But many equipment purchasers don’t have the cash flow to cover the initial costs required. That’s why we need to provide these customers with financial options.”
The options she’s referring to are renting and leasing; determining which is right for you varies greatly with each customer’s unique situation.
“Renting is a great way to get your feet wet if you’re new to the industry or not sure if the piece of equipment is right for you,” says Craig Slobodian, Corporate Sales Manager for Construction Equipment with Redhead Equipment. “Demoing a unit doesn’t tell you enough. By renting, you get the benefit of trying the unit for an extended period without the full investment. Plus, you get the uptime associated with brand new equipment. ”
The most significant benefit to renting is the flexibility, because there is no long-term commitment and very little risk. If you only need a unit for a few months to handle a specialized job or realize halfway through your job that you require a larger or smaller machine, renting enables you to adjust to those changes on the fly. The downside to this convenience is that you’re compensating for it through a higher payment.
“Often we see customers rent for a month or two and next thing you know, they’re five or six months into a piece of equipment,” adds Slobodian. “At that point we convert the product to a rental-purchase and we will apply a portion of that rent to the purchase price. This way they get the best of both worlds.”
On the other hand, with most established equipment users in the oil and gas industry quoting jobs based on set costs and timelines, consumers are beginning to adopt leasing as a practical option as well.
Leasing provides users with a low down payment, and considerably lower monthly payments due to the residual at the end of the lease term. In addition, it delivers tax benefits in the form of deferring payments of GST and PST to monthly rather than paying them upfront, as well as the potential ability to write-off lease payments as an expense at the end of the year.
Leasing also enables you to keep your fleet up to date. In many leases you can purchase or walk-away at the end of a lease term, allowing you to upgrade to a more current model year if you choose.
“By keeping payments low, leasing frees up your cash flow and line of credit to get you through those quiet times during the year,” says Sparrowhawk. “We work closely with our customers to tailor the lease to meet each individual’s specific needs so they can quickly acquire the equipment they need for their job.”
Currently in the United States, nearly 60 per cent of heavy equipment in use is being leased, while in Canada, only 15 per cent of users are leasing that same equipment. Why such little uptake north of the border?
“There’s a bit of fear of the unknown,” states Sparrowhawk. “However, as equipment buyers have become more familiar with leasing products, perhaps through leasing their own car, they begin to see the benefits. With the economy slowing down in 2016, finance companies have become more aggressive with their lease offerings; this will enable us to offer our customer’s a very competitively priced product.”
Another side to it is that many customers are simply not aware that this option is available to them. “Our Redhead Equipment Business Managers across the province are looking forward to having that conversation to educate our customers on the value of leasing,” adds Sparrowhawk. “Once consumers realize they can still get into the unit they desire, at a monthly payment they’re comfortable with, we anticipate an increase in customers choosing to lease equipment this year.”
With over 65 years in the industry, this isn’t the first time Redhead Equipment has seen Saskatchewan weather a troubled economy. The province made it through the recent challenges in 2008 and no doubt will do the same in 2016. The key for businesses dealing with these circumstances is financial flexibility.
“There are so many options we can offer our customers who are experiencing the stress of the economic slowdown. We’ve worked jointly with our customers and various finance companies over the past few months to refinance equipment, restructure leases and loans, and we have even taken equipment on consignment if the customer no longer had a need for it in their fleet,” says Sparrowhawk.
“We also have financial solutions to assist with equipment repairs and parts purchases. Rather than the customer having to front the whole bill at the time of purchase, we provide some excellent revolving card products, on approved credit. Many of these card products come with a variety of payment terms, and depending on the current promotion offered when you sign up, they could earn you cash back or even 90 days, no interest.”
“The last time our economy faltered, we assisted many customers in downsizing their fleets, whether through paying out trades when a new piece was leased or even taking two trades on one,” adds Slobodian. “The key is creating flexibility and available cash for our customers so they can focus on what matters; running their business. “
Though it might not seem like it, with many machines still available at very favorable exchange rates and a variety of financing options to choose from, right now is actually a great time to get into that equipment you need. Whether you decide to purchase, rent or lease, it’s all about fitting the equipment to your job, on your terms.
Note: Redhead Equipment does not provide tax or accounting advice. Please consult with your tax attorney or accountant about your individual financial circumstances
(The previous article “The Right Equipment on Your Terms – A buyer’s guide on whether you should purchase, rent or lease in the current economy” was archived in the 2016 Edition of the Saskatchewan Oil Report.)