One of the tough decisions often faced by earthmoving and construction businesses, no matter their size, is whether it is best to purchase your next machine outright or if hiring one is a more cost effective and feasible solution.
Say, for example, you have won a new contract – great! BUT you don’t have a machine in your fleet required to complete the project at your disposal, what do you do? Hire or buy?
Well, unfortunately there is no one correct answer, all situations are unique so consequently, there is no one-size-fits-all solution. With no rule in place when it comes to buying or hiring new plant, and with pros and cons associated with both options, how do you go about this decision and work out what’s best for you and your business?
In this article we take a quick look into the major considerations involved in the decision-making process as well as talk about how tailored finance solutions can help to alleviate some of the stresses that can be encountered.
#1 Think about the usage to weigh up the costs
This one may seem like a ‘no brainer’. But how do you compare the costs of hiring versus buying?
The first thing to do is look at the machine usage: What exactly are you going to be using the machine for? How specialised is it? Are you going to use it every day? How long are you using it for? Answering these questions should give you an idea of which way to go.
If, for example, you’re using it over a longer term, say a few years or more, and you plan to operate it for at least a few days a week, then purchasing a machine would probably be the right answer for you. The cost of hiring a machine adds up over time and additionally you need to ensure the availability of the machine for the length of the project. Buying the machine gives you peace of mind that it is there ready to go when you need it.
On the other hand, if it’s a highly specialised piece of plant, that will only be used for a couple of hours a week, then hiring it may be a more cost-effective solution. Arguably, the biggest benefit of equipment hire is that you only pay for what you need. Buying a machine that just sits in a yard gathering dust only costs you money. As a general rule-of-thumb however you can work on the basis that hiring equipment works out to be 3x more expensive than buying it.
You also need to consider other costs you will come across when purchasing a machine such as: machinery insurance, repairs and maintenance and whether you need to hire an operator. Buying a new or near new machine, say 3 years old or less, can reduce the money spent on R&M and if buying from a recognised dealer, they may include a service agreement with the purchase.
#2 Consider your finances and possible tax advantages
Obviously if you’re looking at buying the machine, you also need to look at your current financial position. Buying a new machine outright means outlaying a chunk of capital. Can you afford to buy the shiny new machine in your business’ current position?
Funding the machine could be a viable option here to help conserve your cashflow. Rather than forking out the cash on the purchase of a new machine you could instead finance over a fixed term, giving you an easy-to-manage monthly repayment. With low interest rates available today and streamlined equipment finance products specific to earthmoving assets in the market, now is a great time to fund equipment.
Another benefit of funding the equipment is that it can provide you with tax breaks for your business. A standard chattel mortgage type facility for example will allow you to claim the depreciation and interest. There is also the current tax incentive for the write off for the purchase of business assets of $20,000 that the Government has extended into this financial year.
Another alternative to hiring a machine is a rental finance product. Repayments on rental products are typically 100% tax deductible and they are off balance sheet as the lender owns the equipment and you rent the asset from them. At the end of the minimum rental term you may have the option to purchase the machine should you wish to do so later down the track.
#3 Look to the future
You don’t need to go far to witness first-hand the enormity and scope of major infrastructure projects that are being completed in our major capital cities. Our national population is expected to reach 35.9 million by 2050 and to cope with this growth Australia has become, quite literally, a nation under construction. The 2019 budget was announced in February and confirmed that the Government has committed to over $75 billion for the next 10 years in transport infrastructure alone.
This is all good news for anyone in the earthmoving and construction game. The economy is strong, the future is bright, providing you with a certain level of security when it comes to lining up that next job. With jobs on the go, and work lined up for the future now may be the right time to purchase the new machine with peace of mind that the machine can get to work on that next big project soon. By using a finance broker, they can guide you through the finance process and do the hard work for you, allowing you to concentrate on running your business.
If you are looking for a finance broker to partner with you for your next equipment purchase or if you have a finance query of any sort, Magnolia Lane Financial Services would love to speak to you. They pride themselves on helping their clients grow and succeed. Call them on(02) 8287 3000 or email admin@Magnolialane.net.au.