I'll take it

By Edmund S. Tijerina

When considering whether to get new equipment, ask yourself this question: How am I going to pay for this?

There's always just buying it. But there are plenty of other options as well. There's renting, leasing to own and renting to buy.

The main advantage of buying is that it is ultimately the least expensive way to acquire a piece of equipment, says Norm Knief, president of Lincoln Contractors Supply Inc. of Milwaukee, which sells, rents and leases construction equipment.

On the other hand, the chief advantage of leasing is flexibility.

"If you're a credit-worthy business, you can go to the bank and finance something," said Larry Elton, president of Advantage Lease. "But we'll do it in a way the bank often won't."

For example, a leasing company has much more flexibility than a bank to work with a customer on details such as the amount of a down payment, term of the lease and final purchase price, Elton said.how do you know if buying is the best thing to do?

That involves considering the value of capital, and deciding whether the equipment will be used enough to make buying worthwhile. "If a customer buys a piece of equipment and pays $3,000 to $4,000 and it sits in the corner of a warehouse, I'd say that wasn't an effective use of capital," Knief said.

Knief offers his rule of thumb: If you would pay more than a one-third of the purchase price for a piece of equipment, you probably would be wise to buy it outright.

"If a customer is in a purchase mode, but hasn't decided on which model to buy, then I might recommend that he rent one model and then the other," he said. "He could probably take the rent off the price of the unit he purchases."

If you're going to make a lease/buy arrangement, you're in the strongest position for negotiating before you start making lease payments. Once a lease is signed, the buyer's position to change the deal weakens considerably.

The simplest way to go is a straight contract, in which you get the equipment and lease it with the aim of buying it. You pay finance charges plus a little to the company that provides the lease. How much and whether to have a down payment or a balloon payment at the end and the term of the lease are all items that are flexible.

"Some people like it because of the timing," Elton said. "For some businesses, it's another source of credit."

But if you're not sure about buying, a lease also makes sense, but the cost of the lease will likely be a little more, Knief said. "If a customer says, 'I may want to buy a machine, but I'm not sure,' then I'm looking to cover more than just interest costs if a guy isn't willing to make a buying decision.,"

Say you start renting a piece of equipment and then later decide to buy it. That will cost you.

"If a customer says to me, 'I want to rent a machine' and later changes their mind and says, 'I want to buy it,' they can purchase it," Knief said. "But if I offer less rental capture, which leads to many complaints."

So think hard before coughing up your hard earned cash. A good deal to rent, lease or buy may help a firm extend its credit and help with cash flow. A poor decision is just wasted cash.