Lease Financing Of Heavy Equipments

For the layman, construction companies in actual work at their sites – with their huge machines and massive equipments – certainly look like they are doing colossal business. The reality, especially for midsized companies, is very different from the looks of it. The owners and their accountants might simply be availing lease financing of heavy equipments.

The construction industry

Just like most other businesses, the construction industry is one of the most capital-intensive industries around. Unless the construction company has sufficient liquid capital, buying the needed machinery and equipments with cash would certainly deplete its capital fast.

Equipment is the largest investment for a construction company. Outright purchases on heavy equipments can run from hundreds of thousands of dollars to millions. Fortunately, there is a way out of this expensive problem: lease financing.

Lease financing solves the company’s problem of spending enormous amounts of cash up front. With lease financing, the company is left with most of its precious cash available for other important use while giving the company leeway to operate at full capacity.

How does lease financing work?

Unlike regular commercial leases, heavy equipment leasing is handled by lending firms that connect construction companies with lessors that offer the needed equipments.

The leasing company agrees with the construction company to lease their equipment and have the construction company pay for their use. Usually, payments are agreed to be paid every month over a fixed period, typically running from two to five years.

The agreement sometimes includes the option for the lessee (construction companies) wanting to own the equipment at the end of the lease term or “return” the equipment to obtain a more up-to-date replacement. The leasing company handles all the paperwork and coordination with the equipment vendor.

Everything from bulldozers to backhoes to cranes can be leased. The construction company will shoulder the lease fees and maintenance costs during the lease term. It will also shoulder the costs of equipment damages and insurance.

Benefits

There are many benefits a construction firm can enjoy in a lease financing plan. The biggest one is holding on to a large part of the capital for other equally-important needs, instead of spending most of it in equipment purchases.

Companies have the option of buying the machine at the end of the lease term. In most cases, they also enjoy discounted rates, too, because the equipments had already been used.

Companies are also allowed to trade-in their present equipments for the latest upgraded models. This is another benefit because heavy equipments are expensive and companies can ill-afford to buy other new state-of-the-art models.

Another attractive aspect of the lease plan is the accompanying tax benefit. In most cases, equipment leasing payments interests are completely tax deductible compared to the partial tax deductions on regular loans. (Of course, it is best to consult your tax expert first regarding this.)

Most leasing companies permit construction companies to directly negotiate with the equipment vendors and choose the equipments themselves. Afterwards, the purchase order is assigned to the leasing company (who pays the vendor directly) and the equipment is ready for use.

In the end, however, it is always best to pay up for your industrial machinery needs if you have enough cash liquidity and can afford them. This is to avoid paying unnecessary interests and other lender fees.

Lease financing of heavy equipments should only be resorted to if there is insufficient cash, or if the company cannot afford purchasing the necessary machinery right away. Finally, it is always good to seek the advice of your accountant or financial advisers before making decisions.