It can be hard to know whether it’s better to rent or buy heavy equipment for many business owners in the warehouse, construction, agriculture, and related industries. Strong cases can be made for either argument, and when coupled with the economic instability brought on by COVID-19, the reasoning for either decision can become even more nuanced. So how can business owners decide what’s best for them? Understanding the benefits and drawbacks of each can help make the right choice clearer, but only after it’s been framed in the context of an operation’s application.
Evaluate Cost of Ownership Versus Profitability of Fulfilling Short-Term Needs
The first thing to consider is whether it would be more profitable to have a piece of equipment as a permanent addition to a fleet or if it would have a higher return on investment (ROI) as a temporary addition. Owning a piece of equipment comes with costs associated like maintenance, training, and upkeep, but those costs will ideally be outweighed by an increase in profitability.
Do a thorough cost analysis for buying and compare it to the same analysis for renting. To begin, calculate the ROI and pay-back period (PBP) for a piece of equipment. To calculate ROI, divide net income gained through the new equipment by the total cost of the investment. Once ROI has been calculated, calculate how long the PBP is for that equipment to understand how long it will take before a piece of equipment has paid for itself. Also determine what the cash flow is related to that piece of equipment since not all equipment will likely have even cash flows. In an even cash flow scenario, PBP is calculated by dividing the cost of the investment by annual cash flows. In an uneven cash flow scenario, PBP is calculated by adding the cumulative cash flow at the beginning of the year to the cash flow generated during the year. This is helpful if ownership cost will vary over the life of the equipment or if cash flow will vary significantly from year to year.
Renting equipment can have a high month-to-month cost, but is cheaper if needs are short-term. No maintenance or service costs, predictable monthly costs, and always having access to the latest models instead of being tied to something that may age out can certainly be appealing.
If the return on investment for a new piece of equipment is greater than the profits from renting a piece of equipment, then buying may be the right move. However, if it’s found after running a cost analysis that the profits gained from renting are greater than those that would come from buying, then renting equipment would be the better choice.
Utilization
One of the main benefits of renting is easily expanding a fleet’s capabilities. However, business owners need to consider whether or not the function a new piece of equipment would perform would help grow the business or is only a temporary need. Let’s take the holidays for example. Keeping on top of holiday rushes often requires adding forklifts, but how do you determine if renting or buying would have a higher ROI? If a warehouse experiences a surge around the holidays to the degree that they either lose out on business or are not able to fulfill the demand without adding new forklifts, but the new forklifts would be severely underutilized the rest of the year, then renting may be the most profitable solution. However, if permanently adding new forklifts would help an operation increase the amount of work it could take on and grow that way, then investing in that new equipment may be worthwhile. If a business only needs additional forklifts to fulfill a one-time contract or keep on top of seasonal influx, then renting is the better choice. However, if an operation can grow through buying new forklifts and will ultimately see higher profits from adding them to its fleet, then purchasing could be the better option.
Fairchild Equipment Can Help
If you’re still unsure whether buying or renting is best for your business, we can help you make an informed decision that’s most in line with your goals. Our specialists can run a data-driven analysis for you to help you make the best decision for your business, or if you want to be able to make those decisions on your own, our Smart Fleet software might be the option for you. Smart Fleet can calculate utilization rates for your existing fleet and compare cost of ownership to the cost of renting any pieces of equipment you have your eye on in real time. Our Smart Fleet software can visualize and track expenditures and predict costs to help you make data-driven decisions for your business. Contact your nearest Fairchild Equipment location in Wisconsin, Minnesota, Northern Illinois, North Dakota and Michigan’s Upper Peninsula to speak with one of our specialists about how using our Smart Fleet software could help improve your ROI.
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