The world's concept of ownership is changing. South African companies have traditionally purchased yellow metal equipment outright. There is, however, the emergence of an increasing trend towards alternative funding methods that do not require large capital outlays. While purchasing equipment outright gives businesses the benefit of ownership, 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. There are various options available to companies that can minimize risk and maximize cash-flow.
Vikfin is in the business of offering its clients rent-to-own arrangements. Rent-to-own is a leasing arrangement that provides for the rental of the equipment for an agreed period, at the end of which, the renter has the option to buy. This means that the asset is financed off the balance sheet, thus protecting key debt-to-equity ratios while freeing up cash-flow for businesses to focus on their core activities.
But we know that rent-to-own does not work for everyone. In this blog, we try to break down the benefit and the drawbacks of renting and buying heavy equipment. In making your decision, you need to take into account the following FOUR factors:
Factor 1: Your Current Financial Situation
This is a good place to start. Do you have the capital to buy? Before you answer this question, you need to do some homework. You may have the cash necessary to fund the entire purchase, but how is that going to affect your working capital? Will the purchase put you in a position where you will need to avail yourself of costly working capital funding from your bank? You, therefore, need to project your funding requirements over the next 6 to 12 months. Renting, on the other hand, will allow you to spread payments over the life of the rental and not require an upfront large capital outlay. Having said this, the cost of renting can add up quickly. Rent-to-own contracts are an elegant hybrid between the two options.
Factor 2: Cost of Ownership vs Cost of Renting
You now need to tally up the cost of ownership. These costs are finance costs (opportunity cost if you paid cash), operating costs, insurance, and licensing fees. These costs will vary from machine to machine and will depend on the age of the machine, the conditions in which it is operating, the degree of care of the operator, etc. Renting is an all-inclusive cost but you need to bear in mind that the cost of ownership mentioned above will now be paid by the plant hire company and they will be looking to recoup that cost in the rental. This means that it could six of one and half a dozen of the other. Do not be fooled into believing that renting avoids these costs of ownership.
Regardless of whether you own or rent, you cannot avoid the fuel cost. Budget for fuel being at least 1/3 of your total machine expense. From a tax point of you, all expenses incurred in the generation of income are tax-deductible. If you buy the machine via an installment sale, the interest expense is tax-deductible. On the rental, the great benefit is that the full rental charge is 100% tax-deductible.
Factor 3: The Length and Specilialisation of the Work
If you are looking at a short term highly specialist job, then renting wins. If you are looking for a number of similar jobs over a longer period of time, ownership could work better. Also, if the machine is more purposed for general work (like loaders, excavators, skid steers, forklifts, trucks, etc.) and can be used for various projects, ownership may also make sense.
Factor 4: Equipment Availability & Usage
An unexpected job comes up and you are unable to source the machine from plant hire. This exposes one big advantage of ownership. The machine is yours and it is available to your 24/7 for any job that might come up. The flipside is also true. If jobs do not come up with frequency, there is a risk that the machine might accumulate dust. The robustness of the market is a key variable in this. If the market is robust, then the amount of downtime for your machinery is limited and you want to angle your fleet more towards ownership. When the market is in a downturn, you maybe want to trim the size of your fleet and plug the gaps making use of plant hire. The debate over whether you should own or rent is not binary. Your fleet does not need to be entirely owned or entirely rented. You need to find the optimal mix that works for your business.
Quick Summary
Benefits of Renting
Lower initial investment
Access to a broader range of equipment at all times
Latest equipment usually offered
Maintenance, insurance, etc. handled by another party
Rentals are 100% tax-deductible
Benefits of Owning
Cheaper over the long term
Get a return on your investment when you no longer need the equipment
More flexible—equipment available whenever you need it
Less downtime
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