Adding yellow metal construction equipment to your arsenal can elevate your business into the big leagues, but what do you do if you don’t want the costs to derail your bank account?
Cash flow is arguably the life blood of any and every business, and this remains particularly so for construction companies like yours. If your business doesn’t have a healthy cash flow, it can restrict you in terms of the types of projects you can take on. Similarly, if you don’t have the right equipment on hand, you’ll find it difficult to secure those lucrative projects that your competitors seem to score every time.
However, if you go with alternative funding for yellow metal equipment, it can allow your cash flow to remain flexible. This enables you to not only compete on a level playing field, but also perhaps (profitably) score those projects that you’ve been missing out on.
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Trevor Cronje, CEO of RentWorks says: “While purchasing equipment outright gives [construction] businesses the benefit of ownership, I’d argue that when it comes to yellow equipment, this benefit may be outweighed by those offered by alternative funding options. In the current climate, companies are seeking to improve their cash-flow, which means that capital expenditure needs to be cut wherever possible.”
Assessing your needs: Buy or rent?
It’s important that you forecast your usage of any yellow metal equipment and machinery you need to determine how often you will actually utilise it:
- If your utilisation rate is more than 60%, it might be better to buy the equipment or machinery you need.
- If your utilisation rate is between 40% and 60%, you should look at the pros and cons of owning versus renting, and choose the option that is best suited for your business. (Remember, you’ll need to store and insure this equipment safely too)
- If your utilisation rate is below 40%, renting is the best option.
Here are a few alternative funding options for yellow metal equipment and machinery:
Know the difference: Renting versus leasing
Considering how expensive yellow metal equipment can be, it could make more sense for your business to rent or lease it instead of buying it outright. But, what’s the difference between renting an excavator and leasing one?
Renting offers you the largest amount of flexibility, according to experts, as rental companies typically offer daily, weekly or monthly rates, meaning you won’t have to pay for the equipment when you’re not using it. Rental companies also cover transportation to and from your job site, as well as a wide variety of yellow metal solutions to choose from depending on the type of job you’re working. However, a downside to renting is that the cost is normally higher than a lease or loan payment. You’ll need to determine the most cost-effective decision for your construction business here.
Leasing combines the benefits of both renting and buying. Leases usually last for a year or more and involves less cost upfront, which frees up your capital and doesn’t tie up your credit lines. However, leases tend to offer higher interest rates and attract higher insurance premiums.
Since the lease continues over a pre-determined amount of time, you will be paying for the machinery whether or not you use it. Certain leases might also include penalties for damage, and wear and tear on the equipment, so don’t get caught out.
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You can try a combination of both
Depending on the size of your business and how often you actually use yellow metal, it may be beneficial to try a combination of all three funding options. You could potentially own the core machinery that you use regularly, lease the equipment you use fairly often and rent the equipment for more specific tasks or during peak times.
No matter which option you choose, you’ll need to calculate your cash flow, profits and expenses to safeguard that you make an informed decision that will benefit your construction business for the long term. By ensuring you have all the facts, it will ensure you don’t regret whatever decision you make.
- Construction companies are seeking to improve their cash-flow, which means that capital expenditure needs to be cut wherever possible.
- Renting offers you the largest amount of flexibility, but could also be the most expensive.
- Leasing is longer-term and more cost effective, but that means you’re still paying for the equipment even when you aren’t using it.
- Your construction business could use a combination of buying, leasing and renting to take advantage of the most cost-effective options.