July 28, 2015
Three Reasons Equipment Leases Are Becoming More Prevalent in the Stone, Sand, and Gravel Business
The quarry and aggregate equipment acquisition mindset has traditionally been to purchase a loader or haul truck and squeeze every ounce of life out before turning it over to the scrap yard. There are, however, several benefits to leasing of which more and more aggregate companies are taking advantage.
1. Increased ability to tweak your operation and maximize productivity.
Small changes to your operation can pay off in big productivity gains. But you may be less inclined to make an equipment change if it involves purchasing a new machine. Flexible lease terms provide an opportunity to turn a machine back in and replace it with a newer model. The state-of-the-art machine you buy today may not be as productive or efficient as others coming on the scene tomorrow. Leasing makes it easier to stay up to date with the newest models to remain competitive, or to meet new or changing local emission requirements. And with your newer equipment, you'll experience less downtime and a reduction in maintenance expenses — without retaining equipment that has outlived its peak effectiveness.
2. Cash for other needs.
Another advantage is lower payments and less capital outlay up-front. Compared to the 10- to 20-percent down payment required on an installment loan, leasing generally requires only the first two monthly payments, which are calculated by the lender based on an assumption of how much the equipment will be worth at the end of the lease. That figure, called the residual value, is subtracted from the retail price, and the remainder is spread over the length of the lease term in monthly payments that tend to be generally lower than those on an installment loan. In addition to keeping your cash flow more predictable with regular payments, leasing can have a positive effect on your balance sheet. In fact, under certain circumstances, leased equipment doesn't even appear on your balance sheet because it's considered neither an asset nor a liability. This can be very important to your future acquisition plans because it strengthens your financial ratios.
3. Tax advantages.
While installment loans may let you depreciate the equipment and apply that deduction on your tax return, leasing may also enable you to deduct expenses. Both options reduce your tax liability, but leasing often creates a greater deduction. If reducing your tax liability is a high priority, you should always get firsthand advice from your tax advisor. You have several options at the end of your lease term. If you decide to keep the equipment in your fleet, you can simply renew the lease, convert to a rental, finance it on an installment note, or purchase it outright.