Rental vs. Purchase – What companies should consider

With pros and cons to both renting and buying, it pays to evaluate your company’s current situation and capabilities (financial and otherwise), your future plans, and carefully consider which method of acquiring equipment will be most advantageous to your business – and which is also simply going to make your life easier. Certainly, the initial cost is a major factor in the decision process, but it’s not the only one – there are several things to consider when it’s time to gear up – usage, availability and more.

Important factors:

• The Business Current Financial Position

Does the business have the capital to buy or is renting a better option for now? Any business should look deeper than the current situation and project the costs over several months or years. Although buying may be a larger one-time financial outlay, the cost of renting can add up quickly, and over a long period of time can end up costing you more – especially if the equipment isn’t being used for the entire rental period. And don’t forget: when you own, you can see a return on your investment when you sell. Depreciation plays a role and a client must consult his auditor or accountant to provide the business with the best advice for the business at the said time.

You can reduce the initial financial impact of buying a piece of equipment in many different ways:

Purchase used equipment – when you rent, you are often paying for the newest equipment with the latest technology; purchasing well-maintained used equipment can be cheaper than buying new equipment and may be more cost-effective than renting over the long term

Finance your equipment purchase – give your company some extra financial breathing room by financing your equipment purchases and keeping your capital to run your business, your payments could even be lower than rental payments.

It is still important that the business takes all financial aspects into account as the business balance sheet can determine the need for rental or traditional finance. Gearing ratios, VAT, Expense write-offs, depreciation items, asset value, finance charges, and tax must also be considered with the purchase or financial decision.

• Ownership vs Renting

It’s also important to estimate the cost of equipment ownership versus the cost of renting equipment. With ownership comes maintenance and operating costs, insurance and other fees and those costs obviously vary from manufacturer to manufacturer. Renting is generally an inclusive cost, but given that a rental company has to turn a profit, you should consider that your rental fees will include the purchase price and the cost of ownership, both marked up. However, there is different types of rental instruments for different types of asset classes.

Once again talk to your accountant or auditor about the possible tax implications (or advantages) of buying or renting equipment for your business.

Renting has also become very popular in the South African market as several clients choose the rental route as they feel that their company will benefit more from this comparing the installment sale route. Auditors and accountants also interpreted this instrument differently and as per the benefits of the business in terms of rental payments in the expenditure statement, off-balance-sheet asset, VAT claims upfront or per month on the rental schedule. Depreciation if the asset is on the balance sheet or the full rental expense for tax benefits.  

• Length of Project/Contract

Of all the things to consider, project length or the frequency of jobs on the calendar could be the deciding factor in whether you rent or buy equipment. If it’s a short-term job, or you need a specialized piece of equipment for a one-off job, then renting may make more sense. The risk, of course, is that if the machine isn’t being used for the entire time it’s rented due to changes in the project schedule or unforeseen hold-ups, then you’re spending money on a machine that’s sitting and waiting, not making you money.

If you’re working on a long project, or if you’ve got several jobs on the horizon, then buying probably makes better sense given that rental costs add up quickly the longer a job goes on. And a multi-purpose piece of equipment (loaders, excavators, skid steers, forklifts, trucks, etc.) that can be used for various projects is a great asset on any job site!

•  Fleet management and inventory control

Managing your equipment is also something to consider. If you have the skills and the time, you can save money over the long haul by buying some or all of your equipment and taking care of insurance, maintenance, etc yourself; if you don’t, you may want to pay a little extra to rent without any hassles. For shorter-term jobs, you may want to consider renting, but buying gives you added flexibility. Let’s say you project that you’ll need a piece of equipment for three months. If the job extends for another two months, you have the machine at your disposal. If the job ends and you decide you don’t need it, you can simply give it back to the supplier or the rentor with the option to upgrade or renew.