Construction equipment is in the midst of a high-demand cycle after emerging from a market coma exacerbated by the pandemic. The demand for heavy machinery has been explosive, and because of this the cost of this equipment has continued to rise. Production and supply chain issues have added to the cost of machinery and according to the Association of Equipment Manufacturers, there was a 9.7-percent increase in the price of construction equipment in the past year. The booming demand for construction coupled with the rising cost of equipment is causing construction companies to scramble and decide where best to allocate their funds.
Construction companies need to determine what equipment they are keeping, selling, or trading. Inspecting and cleaning equipment will help determine its true value. Once the decision is made to acquire new equipment, it is crucial to jump into the process as soon as possible and expect to pay market rates.
When it comes to paying for new equipment, two options include financing or leasing. Each has its pros and cons.
Pros and cons of equipment financing
Equipment financing can be an effective solution and loans can be used to purchase trucks, excavators, and other heavy machinery. the long- and short-term benefits of financing. If the equipment will bring in revenue that is greater than its monthly payment, then financing would be a good option. Construction equipment is often used for a long period, so it will also continue to be useful long after it is paid off.
Pros:
- Owning equipment: Once the loan is paid off, the equipment will be yours.
- Flexible credit approval: Construction equipment can also be used as collateral to borrow against or even resell.
- Ease of qualification: Since the equipment is used as collateral, credit scores won’t be as much of a consideration. In many cases, owners also won’t be held personally responsible for repaying the loan.
- Tax benefits: Often, the cost of newly purchased equipment is fully deductible. In other cases, depreciation deductions are available.
- Build credit: Building a history of on-time loan payments increases credit scores and makes it easier to qualify for other loans.
Cons:
- Can require an initial down payment that may affect cash flow.
- Can have higher interest rates than other types of loans.
Pros and cons of leasing equipment
When leasing construction equipment, the borrower is agreeing to rent the equipment for some time. At the end of the lease, the equipment will be returned, although there may be an option of renewing the lease or purchasing the equipment.
Pros:
- Potentially more affordable: Monthly payment may be lower than a comparable loan. Rarely requires a down payment.
- Useful if the equipment could become obsolete shortly
- Tax deductible
Cons:
- Fewer options: It is harder to find available equipment, particularly in the current market.
- Fees: Borrower may be held responsible for insurance, maintenance, and other fees on top of monthly payments.
While the construction industry continues to grow, the demand and cost of equipment will continue to rise. It is imperative that construction companies assess their current inventory of equipment and accurately determine their needs so they can decide the best purchasing options for their equipment. Equipment financing can help you scale the business without depleting cash reserves. Qualifying for equipment financing can be easier than SBA loans or other business financing options because the lender uses the equipment as collateral.
Replacing outdated equipment shouldn’t be put off because of a lack of funds.
--This article contributed by Lendio
