Electrical contractors can obtain needed equipment by purchasing it, leasing it or renting it. Electrical contractors use each of these three equipment acquisition methods every day and each method has its advantages and disadvantages. The decision to buy, lease or rent a particular piece of equipment depends on a variety of operational and financial factors that need to be carefully analyzed to determine the preferred acquisition method given your firm’s circumstances.
Purchasing and owning large equipment such as boom trucks, scissor lifts and backhoes is usually well understood. Similarly, renting equipment on an as-needed basis to fill short-term equipment shortages or specialized equipment needs is also well understood. However, the advantages of equipment leasing as well as typical leasing arrangements are not as well known and you could be missing out if you don’t understand them. This article will provide an overview of equipment leasing.
An equipment lease is a commitment by the electrical contractor to pay an agreed amount on a regular basis for a fixed period of time in exchange for use of a piece of equipment. The terms and conditions of the lease are included in the lease agreement, a legal contract between the electrical contractor and the lessor. It is very important that you fully understand the terms and conditions of the lease agreement and their implication for your firm before entering into it.
Unlike renting, which may be for an hour or day, or ownership, which can be until the equipment is scrapped, the lease period is usually a fixed period of time that is at least a year and typically extends for the economic life of the equipment. Lease periods can often be arranged that will be longer than a conventional loan for purchasing the equipment. As a result, a long-term equipment lease can result in smaller monthly payments and improved cash flow for your firm.
Lease payments will depend on the cost of the equipment being leased, the length of the lease, special lease provisions and the disposition of the equipment at the end of the lease. Lease payments are typically required to be made monthly over the life of the lease. However, these payments do not have to be the same amount every month. Lease payments can be tailored to your business.
For instance, if your firm is entering a new market and needs start-up equipment, lease payments can be structured in the first year to be lower than in subsequent years to improve cash flow. Similarly, if your firm’s work is seasonal, lease payments can be structured to vary with the construction season.
Leases can be thought of as 100-percent equipment financing for the electrical contractor. Unlike equipment loans that require a substantial down payment, equipment leases typically do not require any up- front payments. Sometimes the lessor will request one month’s payment in advance or a security deposit, but this is usually negotiable. No down payment improves your firm’s cash position and preserves your line of credit.
You may be able to acquire more needed equipment for your firm’s expansion through leasing with no down payment than you could by purchasing it with a hefty down payment. Also, a lease can include other initial costs associated with putting the equipment into operation, such as delivery, setup, extended warranties, maintenance agreements, taxes and licenses as part of the regular lease payments.
Equipment leasing is also sometimes referred to as “off-balance-sheet financing” because leases may not be included as liabilities on the electrical contractor’s balance sheet. Reduced liabilities can result in a stronger balance sheet that in turn may result in increased lines of credit and bonding capacity. You should work with your accountant, banker and surety to determine if equipment leasing can help your firm profitably increase its volume of work.
If your policy was to own your equipment in the past, it doesn’t mean that you have to wait until you replace existing equipment to take advantage of the benefits of equipment leasing. Many lessors will purchase your existing equipment and lease it back to your firm through a sale/lease-back arrangement. If leasing is right for your firm, a sale/lease-back arrangement will not only provide you with the advantages of equipment leasing, but will also result in a cash infusion from the sale.
This article has discussed some of the advantages of equipment leasing for the electrical contractor. As noted above, leases are contracts and can be very complicated, both legally and financially.
Before entering into an equipment lease get expert advice and involve your accountant, attorney and insurance carrier to make sure that you make the right decision. Under the right conditions, equipment leasing can be very advantageous for the electrical contractor. EC
GLAVINICH is an associate professor in the Department of Civil, Environmental and Architectural Engineering at The University of Kansas and is a frequent instructor for NECA’s Management Education Institute. He can be reached at 785.864.3435 or firstname.lastname@example.org.