Buy, Lease, or Rent?
Decisions involving heavy equipment are usually complex and involve many considerations beyond which model to buy. In fact, when to replace and how to replace may be the most important considerations.
 
Money can be scarce, even for the biggest of companies, which means that most will avoid paying cash for anything that does not absolutely require it. Conservation of capital (cash) is the big reason most companies  buy,  lease,  or rent on some type of installment plan.
 
 Compare,  these three alternatives,  review reasons to finance or lease, and ask yourself some questions before deciding how to proceed.

If you're ready to apply download the credit application.
 
The following comments provide some of the considerations which customers should weigh in reviewing their acquisition alternatives:

Buy? (Purchase)
Cash purchase with funds provided from working capital is normally the lowest cost method of acquiring needed equipment when funds are available. Service fees, finance charges and interest expense are eliminated for the buyer. Customer ownership is immediate, and equipment cost is shown on the balance sheet subject to the depreciation methods used by the customer.

Although outright purchase may provide the lowest total cost, other factors should also be considered.
1. Working capital (cash) which could be used elsewhere is reduced.

2. Outright purchase converts a liquid asset (cash) into a fixed asset (equipment), thereby weakening the customer's "current" ratio (see glossary). Accordingly, most companies prefer to use available credit lines or time purchase plans if ownership is intended.

Financing has the same general advantage offered by leasing or rental plans...limited cash outlay. However, financing provides the depreciation and tax benefits of a cash purchase (ownership).

Lease?
Leasing offers several advantages not available with ownership. Leasing encourages a more orderly planned equipment replacement cycle, before maintenance costs become excessive. Leasing also eliminates used equipment disposal problems for the user.

Leasing provides a method of obtaining efficient cost-saving equipment which cannot be purchased with fixed operating budgets. As a rule, it is usually easier to gain approval for equipment under a lease program than as a capital expenditure.

A properly structured lease can provide many financial advantages to the lessee. It can free working capital for other investments while not affecting the customer's borrowing power or credit line. Lease payments may provide a tax deductible business expense, reducing tax liabilities.

Some of the biggest advantages of leasing (particularly for the fleet user) are the opportunity to reduce operating expenses by replacing over-aged equipment without a large capital outlay, the establishment of realistic replacement schedules, and standardization. The typical over-aged fleet is a reflection of changes in past procurement policies. They usually have several makes of equipment, overlap in parts inventories to support the variety of equipment types, and have inefficiencies that stem from an inability to interchange equipment.

Finally, leasing simplifies budgeting, bookkeeping and accounting because it greatly reduces paperwork and administrative requirements. At the same time, records can be enhanced to provide information on equipment utilization and projections for equipment replacement timing.

In considering a lease, remember that options may be incorporated into the plan to give users a variety of alternatives at the conclusion of the contract period.

Rent?
Kelly Tractor Co. equipment rental programs offer many of the same advantages or benefits of lease programs, with three major distinguishing characteristics:
1. The contract period for rental provides complete flexibility, with contract periods as brief as a day, week or month up to one year. However, it is important to note that as rental terms extend, the economic benefits diminish.

2. Rental equipment includes the provision for maintenance unless special provisions are made to the contrary.

3. Rental provides an inexpensive means to try a new piece of equipment without a long-term commitment. In effect it is a paid demonstration.

Find out more about Kelly Tractor Co. equipment rental.

Buy, Lease, or Rent?
The following chart gives some of the major reasons for acquiring heavy equipment under each of the three basic methods (Buy has been broken down into cash purchase and financing).

Reasons to Finance or Lease
1. Conversion of Capital - When capital (cash) is conserved by financing or leasing equipment, it can be used for other company needs (increasing inventories, expanding sales, etc.).

2. Conservation of Credit - A Rental or Lease Agreement is not a loan. Borrowing reduces lines of credit. Leasing is thus a NEW credit source! With "Tight Money," THIS IS IMPORTANT.

3. Balance Sheet Effect - If equipment is purchased and the money borrowed, LIABILITIES are increased; liquidity will be decreased. If equipment is purchased outright (by cash), fixed assets are increased, current assets are decreased...less liquidity again.

4. Impact on Statements - A lease has a direct effect on a balance sheet and current ratio because it is not considered a loan. The entire lease payment is treated as an expense item. However, we suggest you check this item with your own accounting and tax experts.

5. Avoids Dilution of Ownership Equity - It may be better to lease or rent the equipment than to dilute ownership in a company through equity financing to acquire funds.

6. Simplify Accounting - Leasing relieves a user of the responsibility to maintain burdensome cost accounting records and eliminates equipment and depreciation controls.

7. Rental - provides an inexpensive means to try a new piece of equipment without a long-term commitment. In effect it is a paid demonstration.

8. Planned Replacement Program - Leasing or Rental often shields the user from technological obsolescence. He can automatically upgrade his fleet with the latest equipment and attachments at regular intervals. This planned replacement program provides the optimum economic life of Caterpillar equipment, keeping maintenance at a minimum (more uptime - less downtime).

9. Hedging Against Inflation - Financing and Leasing provides for payment over a longer term. Payments are made with tomorrow's dollars which may have less value than today's.

10. Cost - Leasing is generally the lowest cost to use a piece of equipment for a designated period of time. Payments are fixed for the term and can include total costs including maintenance.

Questions to ask yourself
If you want to prepare before talking to your Cat dealer or Cat Financial representative, answer the following questions:
1. Do you have capital, tied up in equipment, which you would prefer to have available for more productive and profitable purposes?

2. Would it help your budgeting if you had a fixed, monthly cost to accommodate your equipment needs (payments and maintenance)? Would you be interested in brand new equipment, for a specified period of time, without a heavy initial capital outlay, but with a set monthly fee?

3. What type of replacement program do you have?

4. Do you have a means of liquidating your used equipment?

5. Would you be interested in having your present equipment replaced with NEW updated equipment?

6. Would it increase your overall productivity to have more freedom of equipment interchangeability?

7. Do your operators take pride in their equipment?

8. Do you know what your equipment maintenance costs are each year for parts, service and temporary equipment during downtime periods?

9. Would elimination of mechanics, stock, and service records alleviate any problems for you?

10. How do you depreciate your equipment? Can you use the depreciation tax benefits being generated? Is it in line with the "optimum economic life" of your equipment, as per industry standards?

11. Do you have a preference for on or off balance sheet financing?

Let us open your account to ensure readiness to serve your needs when they arise. Please complete the credit application and fax to: (305) 463-6081

Please feel free to contact us for further assistance: E-mail us at Marketing@kellytractor.com