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Cash, Loan, or Lease - How to Choose

Cash, Loan, Lease – Which to Choose for Construction Equipment

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Once a business has made the decision to add or replace construction equipment in its fleet, that’s only the beginning. Next comes the decision of how to acquire it.

Should the business purchase the equipment outright? Take out a loan? What about leasing? There are valid benefits to each option. Read on for more info that will help with the final decision.

Cash
A simple way to acquire new equipment is to purchase it outright. Companies in this situation typically have sufficient cash reserves for the purchase. Others will utilize a revolving line of credit with their banking partner.

In either situation the company is potentially depleting access to capital that could be leveraged in other areas of their business.

Loan
Many companies do not have the luxury of simply writing a check for their equipment needs, but still want to own the equipment long term. Traditional loans are well suited for this situation. Most manufacturers offer incentive financing programs with attractive interest rates to facilitate the sale of new construction equipment.

Whether a company chooses to purchase the equipment outright or finance it with a traditional loan, the benefits are similar. At the conclusion of the loan, the company owns the equipment free and clear. For tax purposes, the equipment appears as an asset on the balance sheet and the company depreciates the asset – typically over five years. Current tax law allows for accelerated depreciation on both new and used equipment utilizing bonus depreciation and/or the Section 179 deduction.

Related article: 10 FAQs about Section 179

Lease
The third option to consider when acquiring equipment is leasing. First a quick definition: a lease is a financing agreement where two parties make a contract stating the lessor gives the lessee the right to use specific equipment for a predetermined period of time, and the lessee will remit a rental fee to the lessor as compensation for the use of the property.

The terms lease and rent are often interchanged – a lease is nothing more than a long-term rent, and a rent is nothing more than a short-term lease.

Related article: The important questions to ask when renting equipment 

Leases offer many benefits for a company, whether the equipment is large or small.  

  • Low initial cash outlay compared to an outright purchase or installment contract. Leases typically require the first payment in advance as opposed to 10-20% down on a loan.
  • Lower monthly payments compared to a loan. The lessor takes a residual position in the equipment which means only paying for a portion of the total equipment cost over the term of the lease.
  • Reduce taxes on equipment use. Most states charge tax on the lease payment as opposed to the full purchase price on a loan or outright purchase. This enables a company to only pay tax on that part of the equipment they use.
  • Packaging warranty and preventive maintenance into the lease allows a company to fix its equipment costs over the term of the lease. By fixing the cost, a company simplifies its bidding process – no surprise equipment expenses.
  • Leasing allows a company to always be utilizing the latest technology by replacing equipment on a set schedule. Newer equipment translates into increased up time and profitability for the business.
  • Different end of lease options provide flexibility. The equipment can be returned and replaced with new, the lease can be extended, and if there is a stated purchase option, the equipment can be purchased at maturity.

If written as an operating lease, a lease structure can reduce a company’s leverage position, increasing its working capital. All customers should consult with their accountant to discuss their specific situation.

John Deere recently introduced low lease payments for compact construction equipment. Learn more about the program and find the John Deere machines and attachments that are right for your company.

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About the Author
Derrick Erenstein has been working for RDO Equipment Co. nearly 15 years, and today is Senior Finance Manager. He and his team partner with fellow team members and customers, with the goal of helping customers find the best solution to acquire the equipment they need. While he works at RDO Equipment Co. in Burnsville, MN, his team covers the entire RDO Equipment Co. footprint.

Browse listings of used construction equipment for sale from RDO Equipment Co. or learn more about John Deere compact construction equipment. Find more options of both new and used equipment by visiting your local RDO Equipment Co. store.