Construction equipment financing

It’s a question of efficiency. If your current construction equipment has reached the stage where repairs and maintenance are becoming more expensive and more frequent, or you find yourself having to take on costly short-term rentals for some equipment that you do not have, then it may be time to upgrade or enlarge your equipment pool. Additionally, if you’re taking on a special project that warrants buying or leasing a new piece of equipment, it may be worth doing so. 

Ultimately, regardless of the reason you need new machinery, equipment financing is often a better way to obtain it than paying for new machinery out of working capital. An equipment loan takes the strain off your finances and can give you the option of obtaining better equipment than you could afford if you were paying with cash.  

How do construction loans work? See below:

Types of equipment loan:

Equipment loans fall into two classes – business loans to buy the equipment, and leases that are long-term equipment rental agreements. Let’s look at the differences between these types of financing:

Business loans to buy the equipment:

Although many types of business loans are suitable for buying construction equipment, they all work with the same basic format: You borrow a sum of cash and then repay it over time. Interest charges and fees are added to the principal amount you borrow, and the lender may retain a lien on the equipment during the term of the loan. At contract end you’ve paid off the loan and you own the equipment outright.

Advantages of business loans to buy construction equipment:

• Regular repayments can improve your financial planning.
• You own the equipment at contract end.
• May allow you to buy better and a more expensive bobcat than buying with cash.

Disadvantages of business loans to buy construction equipment:

• Some loans may require added collateral or a personal guarantee.
• Interest rates on some business loans can be high
• At contract end the bobcat may still need replacing or upgrading

Lease the equipment with a finance or operating lease

Leasing works differently from business loans. With a lease, you’re not buying the equipment, you’re taking on a long-term rental. Depending on the type of lease you choose, (finance lease or operating lease), you may have the option to buy the construction equipment at contract end for a pre-agreed sum, (which could be as low as $1 but is typically the residual value of the equipment – which means what it’s worth in used condition). 

Because you’re not repaying the whole cost of the equipment, leasing usually requires lower monthly payments than a business loan. You may also pay a smaller down payment – perhaps equal to one or two month’s repayment instalments.

If you choose not to buy the equipment at the end of the lease, (or you have chosen an operating lease that forbids it), the equipment goes back to the lender. You would then need to take out a new lease and obtain new equipment. (Which could allow you to obtain more modern and up to date machinery).

Some lessors (lenders) may give you the option to extend the lease if you prefer to keep the equipment but do not wish to pay the residual. 

Advantages of leasing construction equipment:

• Pay a lower monthly sum.
• May pay a lower down payment.
• Could allow you to obtain better and more expensive equipment than a business loan.
• No added collateral required.
• May have the option to buy the equipment at contract end.

Disadvantages of leasing construction equipment:

• May not own the equipment at contract end.
• There may be restrictions on the types of equipment you can lease.