Do the math

Deciding whether to finance equipment and vehicles or to buy them outright may be at least partially based on personal preference. But there is also some strategy involved. Making smart financial decisions means weighing the options and doing your homework.
 

Make payments.

Andrew Blanchford, president and founder of Blanchford Landscape Group in Bozeman, Mont., says that cash flow is incredibly important to his business and he can always find better ways to use capital than to lay it out for equipment. As a result, the company almost always finances its big purchases.

With interest rates as low as they’ve been, Bill Trimmer, founder of Professional Grounds in Lorton, Va., says that financing makes a lot of sense. While Trimmer says he can remember a time when it didn’t make sense to finance – in the late 70s when interest rates were as high as 15 percent – that hasn’t been the case in a long time.

“Interest rates getting that high hasn’t happened in 30 years so it’s pretty safe to say that financing big ticket items makes sense,” Trimmer says. “A good rule of thumb is that if you finance and the cost of financing is less than the income you would generate (the ROI) by those available funds, then you should always finance.” It also makes sense to pay attention to the financing packages available year round. “If you need a truck in September and it’s July, but the zero financing is going to end, obviously you need to buy the truck now,” says Dyle MacGregor, owner of Keep It Green in Fair Lawn, N.J.

“Financing a truck at zero percent as opposed to 2.9 or 4.9 can add up to quite a bit of money. Cash flow is important. You can take that money and use it to your advantage somewhere else in the business.” In looking for the best financing deals, Trimmer suggests making use of the online calculators that are available. You can even compare leasing versus buying scenarios.

And remember that there’s often room for negotiation. “When the banker throws out a number, remember that you don’t get what you don’t ask for,” Trimmer says. “It’s competitive out there. Like anything nowadays, it’s always beneficial to get another quote from someone else and have that in your back pocket for negotiating.”
 

Other ways to pay.

While financing makes sense in many cases, when the cash is available, some companies do like to pay in full to avoid debt. Aaron Rodolph, president of Rodolph Brothers in Casper, Wyo., says staying debt free is priceless. When possible, Rodolph does pay in full. But the timing is critical. Cash has to be readily available. If equipment is being purchased in the off-season, Rodolph will often seek out a financing deal with a short-term payment schedule and low interest rate.

“Many brands offer zero interest rates with two-year finance terms,” Rodolph says. “The payments are really high but that is how we keep our debt ratio low which is important to us.” Rodolph says he has been debt-free a few times in the last 16 years of his career. But he recognizes debt is necessary, as long as it’s used strategically. “We utilize a tremendous amount of rental equipment whenever possible,” Rodolph says.

“You can rent almost anything else these days and charge the exact cost of it back to the client. Renting and leasing keeps your overhead low, which frees up capital and credit to spend on things like hiring experienced people, advertising or acquisitions.”

Trimmer agrees. “There’s the saying that whoever has the most toys wins. But it’s not true,” he says. “Renting can be the more profitable option. You don’t want something sitting in your yard that isn’t producing income. Therefore, the harder question is not whether to pay in full or finance. The harder question is whether to rent, lease or buy? We have calculated that we only buy if we use a piece of equipment more than 22 days annually.”

Blanchford has also come to the conclusion that owning isn’t always the best option. He has been operating his company much leaner lately. That’s included monthly seasonal rentals on some of the heavier equipment.

“That has worked out really well for us,” Blanchford says. “For a 10,000-ton excavator we might pay $2,200 a month for five months. But to buy that outright is at least $60,000. While you could finance that over five years, you’re paying year-round, and I’m really focused on cash flow. Making that payment in the off-season is painful, plus you have to factor in the cost of maintenance and repairs.”

In operating leaner, Blanchford says he’s even been selling equipment that is underutilized. Anything that’s sitting around and not getting fairly regular use is dead weight, he says.

“Remember that equipment doesn’t help you grow,” Rodolph adds. “Some contractors get hung up on the idea that having a big fleet of equipment will make them a big company. Equipment is disposable and depreciates by the day. But investing in your people is priceless.”