Equipment rental trend stays strong
The Wells Fargo Finance 2014 Construction Industry Forecast reports that equipment rental will remain strong in 2014. More contractors report they will be renting more in 2014 than 2013. Virtually every rental distribution channel indicates that it will maintain or grow the size of its rental fleets this year.
Whether you rent often or are just beginning to explore how rentals can benefit your business, there are some key factors you should consider.
How much are you going to use the equipment?
This should be the primary factor as you consider rental versus ownership costs, and unless you have fixed contracts in place, you will need to take your best educated guess. What projects do you have contracted—short term and long term? What’s your typical percentage for bids won?
Once you’ve got a line of sight to the volume of work, you can turn your attention to quantifying the actual utilization of the machine you are considering. Probably the simplest way to calculate utilization is to use the industry standard, which considers holidays, maintenance and repairs and between-job lags: if equipment operates 22 days or 176 hours per month, that’s 100% utilization. So, for example, if you estimate that a piece of equipment you’re interested in will be operated for 14 out of 22 days, it has a utilization rate of 64%.
General rules of thumb based on utilization:
- If the utilization rate is more than 65%, owning is usually more cost effective than renting.
- Utilization less than 60% may not generate sufficient profit to cover expenses and operating costs.
- If utilization is less than 40%, renting is almost always the better option.
Do you have the financial “flex” for ownership?
Whenever you finance equipment, you essentially reduce the amount of cash you have available to use for other business needs. You also have to consider that making a purchase could add sufficient debt to limit your borrowing capacity later. The current economy is filled with unpredictability. If you do not have a high degree of confidence in your future projects, rental can give you the flexibility your business needs. Additionally, many rental companies offer rental agreements with options to purchase, so should your business outlook change, you have the option to purchase.
Do you have sufficient maintenance and repair support?
When you own a piece of equipment, any maintenance and repair needs and the downtime that might accompany them are on your balance sheet. Renting eliminates this need as repair and maintenance services are typically included in the rental. If the need arises, the rental company sends someone to repair the machine; if the machine cannot be repaired, it is replaced. This reduces downtime and eliminates any project delays. The other benefit is that most rental companies maintain equipment to the manufacturer’s recommendations and perform routine maintenance to keep the machines ready to rent.
Are you interested in testing new designs or technology?
Rental fleets rotate machines frequently and include newer machine technologies in their fleets to make them more attractive to contractors. Using a rental with an innovative design or technology that you are interested in adding to your fleet gives you a low risk way to try it before you buy it.
Do you have a good relationship with a distributor?
Rental distributors typically carry multiple types of machines and talk to lots of contractors every day about which machines perform best in different applications. Work with a company that you know, or whose reputation you know, and leverage its expertise in selecting the right rental machines.
As construction activity continues to increase, explore all the financial options available to you, so that your business can reap the maximum benefits. Your local Cat dealer can help you determine whether rental, lease or purchase works best for you.
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