It’s almost certain your company will add equipment and tools to its inventory this year. What’s less certain is whether you will buy outright or lease.
Neither choice is all good or all bad, but the result will make a difference on your balance sheet and tax statements. Purchasing, however, is the overwhelming first choice. The 2002 Profile of the Electrical Contractor, this magazine’s survey of 6,000 firms, shows that 91 percent of contractors bought tools and equipment in 2001, with hand tools (85 percent) and power tools (82 percent) topping the list. Low-voltage and digging/boring equipment (12 percent) were at the bottom.
A much smaller group (36 percent) leased or rented tools and, not surprisingly, larger equipment—aerial lifts at 26 percent and digging/boring tools at 18 percent—was leased or rented most frequently. Those who leased most often were what the survey categorized as medium companies (10 or more employees). Fifty-two percent of them leased something in 2001.
The profile called hand and power tools “bread and butter purchases.” They are leased or rented by less than 5 percent of contractors surveyed. The lease and rental of conduit tools, radios and safety and test equipment also falls below the 5-percent mark.
Finding the bottom line
If you’re buying a home or the family car, purchasing habits are deeply personal; a sale can be a psychologically complex transaction and pride of ownership is a powerful feeling. Business deals can be a completely different matter. Though buying something outright is preferred, it might be impractical in certain situations for certain companies, and a competitive contractor knows getting the best deal is vital.
“It’s all about the dollars,” said Lou Matson, president of Active Enterprises, a Chicago-area contractor specializing in backup power. For Matson, who makes the purchasing decisions for his 12-employee firm, leasing is situational, and lease-to-purchase on large equipment is a frequent consideration, especially on booms and lifts.
“We do talk about lease-to-buy with our suppliers on the longer, bigger jobs,” Matson said. “If a job can buy a tool, then after that, it’s found money for us whenever we send it out to a project.”
Active Enterprises falls into the 4 percent of firms that lease or rent conduit equipment. If a six-month job requires a bender for three solid months’ work on 3- or 4-inch, heavy-wall conduit, Matson will assess the cost of leasing versus buying.
“What we look at is if we can take care of at least a third of the cost of the tool in one project,” Matson said. “Many times we’ll buy it, only because we’ve already made a third to half of the payments on it, and then we’ll go from there.”
Leasing and renting
According to the Equipment Leasing Association (ELA), four out of five U.S. companies lease equipment and more than one-third of all equipment here is leased. In the past 40 years, the leasing trend has grown, and the ELA estimates that $204 billion of equipment was leased in 2002, with the construction industry contributing more than 10 percent of that total.
There are exceptions, of course, but contractors typically lease or rent if the equipment is needed only once or for one job and typically purchase for long-term use.
Matson agreed. It all hinges on the size and length of the job. Especially for lifts, he said, because Active Enterprises has grown to where they own several lifts and but bids on projects that require more.
“To have five, six, seven, eight, nine scissor lifts for a company our size is impractical,” he added. “We had one job recently where we actually had four scissor lifts going for four months, plus one boom lift.”
John Hiller, president of Hiller Electric in Omaha, Neb., thinks like Matson. His company, which specializes in commercial and industrial work, employs about 50 electricians, putting them on the dividing line of medium and large companies as designated by our survey.
Hiller Electric makes purchasing decisions by a two- or three-person committee and buys all smaller tools. They lease only a small percentage of their service trucks, which they keep for eight to 10 years and find more cost-effective to buy.
They do some situational leasing. If they had a job in a high-rise industrial complex with tall ceilings, Hiller Electric might lease-to-purchase a specialty boom if it were needed for a long-term maintenance application.
“If we look at a piece of equipment that might be sensitive to one job, we’ll lease that with an option to purchase,” Hiller said. “But let’s say the contract was cancelled after one year, and we wouldn’t need that equipment any longer. Then we aren’t out anything except the lease money.”
Hiller said they “almost always lease lifts,” and our survey shows the average company with 10 or more employees spent as much buying lifts ($14,956) as they did leasing them ($14,522).
Considering that larger firms are more apt to lease vehicles, Hiller Electric closely matches our survey figures. It’s estimated that the 61,414 U.S. electrical contractors spent $200 million on vehicle leasing in 2001, or 17 percent of the $1.4 billion total spent on fleets. Hiller said they lease trucks about 10 percent of the time.
If a vehicle is needed for just one day or a week, why buy or lease? Matson rents scissor lifts, platform lifts and forklifts for moving equipments on sites. Occasionally, he’ll rent larger trucks for moving equipment and materials from the shop to job sites.
“When we need a bigger truck than our ton-and-a-half stake bed,” Matson said, “or need a big box truck to move to a site that we’re going to let sit for three or four days as they unload it around the site, then we’ll rent for short term.”
A contractor faced with the choice of buying or leasing has dozens of factors to consider. Every company is unique, and jobs and equipment needs can vary. Amy Miller Holmes, ELA’s vice president of communications, said leasing is the most advantageous route, in general, when a contractor wants to preserve or raise capital and manage assets. It’s also convenient if the equipment is needed quickly.
Though she’s obviously a leasing advocate, Holmes admitted that buying is beneficial when a company is “sitting on a pile of money.”
“I say that as a joke, but it’s true. If you are cash rich, which very few businesses are, you may want to consider purchasing,” Holmes said. “But even then there are benefits to leasing people should consider.”
The ELA claims leasing companies (lessors) can cut red tape by requiring “minimal documentation,” and many will approve your application within one or two days. The ELA also touts leasing’s tax treatment. The IRS considers an operating lease as tax-deductible overhead—an expense, not a purchase.
However, leasing doesn’t provide depreciation benefits, and Hiller said tax matters are “probably the last thing we consider.” Matson, of Active Enterprises, agreed.
“A lease is a 100-percent expense. We can take it as a write-off for operating costs. What we purchase, we have to depreciate,” Matson said. “Again, for us, the decision comes down to how much use can we get out of that tool in a given year and that’s really what drives it. If it’s going to be sitting more than half the year, it’s really not worth it to buy it.”
ELA notes that operating leases, one of the two most common lease types (see sidebar), does not appear as debt on financial statements, making you more attractive to traditional lenders and bonding companies. Leases can be an excellent choice for long-term contracts where low equipment costs are important for competitive bids. The association also lists these other benefits:
o 100-percent financing. Allows more investment in revenue-generating activities.
o Flexibility. Additions, upgrades, installation, maintenance and other services are lease options.
o Customized solutions. Missed payments, for example, without penalty for seasonal business.
o Asset management. Equipment use for a specific time at fixed payments. The lessor assumes and manages ownership risk and is responsible for asset disposition at lease termination.
o Upgraded technology. Lessen the risk of being yoked to obsolete equipment.
o Flexible end-of-term options. Either renew the lease or purchase or return the equipment.
Benefits of buying
But remember, three times as many contractors bought as leased in 2001. Our survey indicated this often took into account the equipment price or company size and expertise, but for startup companies trying to build equity, buying equipment may be the way to go, and established companies might prefer to buy for their own reasons.
E.G. Middleton, of Norfolk, Va., employs 75 to 100 electricians. They specialize in commercial, industrial, utility work and traffic lighting. President Rudy Middleton represents the third generation at an 83-year-old company with a recipe for success that has seen them through lean times. They buy everything with cash, no financing, and they never lease.
“Leasing’s a dirty word with us,” said Middleton. They’ve learned the basics of asset management and cash flow. For example, to replenish their fleet, Middleton buys two pickup trucks a year.
They’ve tinkered with the formula, buying four trucks one year, but found it hampered cash reserves. They maintain their trucks for the long haul.
“We run them until they die,” Middleton said with a laugh. “You don’t want to buy one of our used trucks.”
Middleton doesn’t want lease payments hanging over his head if work starts to dry up. When a job requires it, he’ll rent a lift or air compressor, but avoids long-term contracts. A good rule of thumb, he said, is that if a job will pay for equipment, buy it.
“You can show me all the rosy figures on leasing, but you can’t convince me,” Middleton said. And though our survey shows larger companies lease more, Miller Electric, a 200-employee firm in Omaha, Neb., with more than $25 million in annual revenues, buys everything. Miller, which specializes in commercial, industrial and low-voltage, rents only special testers, such as OTDRs.
“We’re kind of a conservative company,” said Don Fitzpatrick, Miller’s president. “We make sure we have some cash available. We pay cash or we’ll just borrow a bit of money to pay for it, but we never lease.”
Before you decide to lease, think carefully how the equipment will be used and whether the lessor understands your business. A low lease rate might look initially attractive, but a manufacturer’s finance company can provide subsidized interest rates. These “captive” finance companies tend to know their customers and equipment better and might be forgiving if a contractor has to miss a payment.
Remember that paying cash is always the cheapest way to add equipment and that, to break even, some industry experts suggest equipment must be used 60 to 70 percent of the time or more than 30 hours a week.
If speed and convenience are essential, an outfit such as Graybar Financial Services (GFS) can lease equipment quickly. In addition to providing conduit benders, cable pullers and datacom equipment testers, GFS can finance a project.
Stuart Jaeger, Graybar’s national sales manager, said contractors can use GFS as a financing tool for end-users who might suddenly need capital for a project. The contractor acts as a contact and conduit to help “lease” the capital, and the end-user makes monthly payments to GFS. Because
Graybar has built relationships with thousands of electrical contractors, Jaeger said GFS can, in essence, give its customer base preferential treatment in lease processing.
With its quick-quote calculator, online credit application and information links, Graybar’s Web site serves as a one-stop lease and financial center. A contractor who has history with Graybar can often get a lease worked up in a matter of hours, and Jaeger said GFS has been leasing to big and small firms since it started 15 years ago.
“You’d be surprised,” Jaeger said. “People think that some of these larger contractors have rooms full of cash. But they often don’t.”
It’s wise to check with your attorney or accountant first before signing a contract. Ask if the lease can be changed or terminated early and who is responsible for damage. Learn the tax and maintenance obligations and whether equipment additions and upgrades are possible. What are the end-of-lease options and what happens if you choose to return the equipment?
Some leases don’t allow prepayment and others require restoration of the equipment before it’s returned. Find out the maximum-use hours, and remember, though leases are often flexible, credit conditions could be more difficult than regular bank financing. Perhaps most important, find out if there are extra costs at the end of the lease.
At delivery, double-check the make, model and serial numbers to avoid problems. A security deposit or advance payment may be needed before delivery. Most lessors require insurance, naming them as the policy’s first payee.
The smart contractor will explore all the leasing and buying options, weigh the pros and cons, and make the best decision for the company. EC
FULMER is a freelance writer in Baltimore. He can be reached at firstname.lastname@example.org.