Budgeting for Rentals vs Capital Purchases  

Budgeting Strategies for Heavy Equipment Acquisitions  

Your construction, material handling, or specialty business is evaluating new heavy equipment to cover emerging business needs. On one hand, renting heavy equipment seems attractive because it’s easy and low risk. On the other hand, purchasing heavy equipment feels like the more reliable and controllable option.  

Before you can decide to rent or purchase though, you must first understand how to prepare and evaluate budgets for either case. In fact, going through the process of budgeting for new equipment very often exposes one option as most financially viable, making it the clear winner.  

The best way to think about the concepts of renting and purchasing equipment is as financial strategies aimed at balancing costs with capacity, in these ways:   

• Renting Equipment is most often employed as a cash-preservation strategy, allowing a company to quickly gain capacity with minimal capital outlay, though at a higher long-term cost.  

• Purchasing Equipment is most often employed as a long-range cost management strategy, securing permanent capacity growth while lowering operating costs, though at a higher upfront outlay.  

With these strategies in mind, budgeting for heavy equipment tends to boil down to one factor: real cashflows. All the budgeting analysis in the world can’t overcome the fact that tight cashflows favor renting, and flush cashflows favor purchasing. But that’s a great oversimplification, so let’s dive into the details.  

Coming up, we’ll provide you with a comparison of heavy equipment rentals versus purchases from an organizational management standpoint, and then walk through a recommended financial analysis process for preparing your own budgets.

Comparing Organizational Factors of Renting vs Purchasing Heavy Equipment  

At the highest levels of an organization, the decision to rent or purchase heavy equipment is really a risk-reward assessment. In turn, budgeting for either renting or purchasing equipment is a matter of assigning dollars to each potential risk and reward involved.  

On the risk side, dollars are budgeted for direct costs such as equipment payments, and indirect risks such as the cost of unfulfilled demand.  

On the reward side, dollars are budgeted for direct benefits such as faster project completion and indirect benefits such as higher customer satisfaction. 

To help you further think through financial factors that need to be incorporated into your equipment budgets, see this table:  

	Rent	Purchase
Investment	Low upfront investment	High upfront investment
Financial Goals	Minimizing short term costs and preserving capital	Minimizing long-term costs and gaining asset value
Typical Budget Timeframe	Weeks to months (short projects or seasonal peaks)	5-7 years (ongoing, permanent business needs)
Financial Flexibility	Highly flexible – can cancel rentals at any time	Highly inflexible – requires selling the equipment
Cashflow Impact	Predictable through lower reoccurring rental fees	Increasingly variable over time due to maintenance needs
Capacity Availability	Dependent on rental availability	Permanent availability ready at all times
Expense Categorization	Rental costs can often be categorized as operating expenses	Purchase costs can often only be categorized as owned assets
Tax Implications	Moderate deduction potential with some exceptions	High deduction potential plus bonus depreciation and tax exemptions
Liquidity Impact	Liquid – rentals tie up limited sums of cash, and can be called off immediately	Illiquid – purchases tie up large sums of cash that can’t be recouped unless sold
Service Costs	Included in rental fee	Paid as needed
Ongoing Costs	Higher – rental fees will exceed purchase costs in a relatively short time	Lower – purchase costs will total less than rental fees over time
Insurance Coverage	Covered by short-term policies or damage waivers	Covered by long-term inland marine (or equivalent) policies
Training Costs	Rental company may offer limited orientation, or training at additional cost	Training costs covered by the business
Indirect Cost Impacts	Avoids secondary costs (added maintenance staff, parts stock, etc.)	Incurs secondary costs (charging systems, storage areas, spare parts, etc.)

A Note on Equipment Leases 

For the purposes of this article, leasing equipment is bundled up with rentals, as both are ways that fleet managers temporarily borrow and return equipment owned by another entity.  

Lease agreements tend to be longer term, offering slightly lower fees with greater restrictions. Rental agreements are the opposite – slightly higher fees with fewer restrictions.    

In practice, lease agreements have several notable distinctions to consider in the context of financial budgeting: 

• Leases with buyout options will have tax implications should the equipment be purchased later.  

• Leases are less flexible than normal rental engagements, which may present future cost drivers (such as being stuck paying on a lease during an unexpected demand downturn).   

• Leases trend closer to direct ownership in terms of amenities offered by the leasing agency. For example, most leasers are responsible for the full costs of maintenance and emergency equipment swaps.   

• Break-even analysis is unique for leases, as lower lease costs often “buy more time” than rental costs. For example, a six-month rental might break even with a full year lease, providing greater overall value.    

Using a Financial Analysis Process for Heavy Equipment Procurement  

So far, we’ve covered the strategic budgeting goals of renting versus purchasing heavy equipment, and listed out the main organizational factors that need to be considered when preparing an equipment budget. Now let’s give you a budgeting framework to plug these concepts into, step by step.  

• Align to Company Objectives – to start preparing an equipment budget, we suggest writing down the company goals that your budget must achieve, and be specific. Examples: “Fulfill a 10% demand increase for June at no more than $15,000 cost” or “Acquire backup equipment to eliminate seasonal overtime”.  

• Gather Real Cashflow Requirements – as we mentioned earlier, budgeting almost always comes down to real cashflows. No matter if you’re solving for max outflows (like lease payment limits) or targeted improvements (like operating expense reductions), write those cashflow requirements down.   

• Forecast Utilization – estimate how much your new equipment will be utilized both in the short-term and long-term. This is another way to gauge your cashflow impacts, either being a short burden or a permanent expense. We use this rule of thumb: utilization over 70% leans towards purchase, and under towards heavy equipment rental.  

• Quantify Organizational Factors – looking back at our table above, now quantify organizational factors into your data set. Add budget amounts for things like insurance, training, tax benefits, and so on until you have a good picture of the various direct and indirect sums involved.   

• Compile a Budget Model – now you have enough data to compile a budget, which you can summarize into a simple budget statement such as “Our organization can spend $1,250 per month for (6) months for new equipment to achieve a 5% operating expense reduction based on 85% utilization.”  

• Solicit External Costs – now you’ll acquire outside costs such as rental and purchase costs, insurance costs, tax impacts, financing rates, and so on. Many folks will naturally start with this step. We prefer to establish internal budget brackets first so that when we do solicit costs, we already have realistic targets in mind.  

• Finalize your Budget – in this last step, you’ll put your internal budget requirements up against gathered external costs and see how things shake out. Once you update your budget model with real costs, you should see one option clearly stand out as the solution to your initial objectives and cashflow requirements.   

If your budget doesn’t reconcile the first time, don’t worry – that’s very common. Most often, that just means you’ll need to examine a few more external cost options (such as less expensive equipment or longer financing terms), as well as work with your internal team to prioritize cashflow limits and cost goals. Many buyers will also perform in-depth financial calculations such as Net Present Value, Internal Rate of Return, and Break-Even analyses at this point. Once all of this is complete, your budget will be fully validated and ready to execute.  

We hope that this discussion has been helpful for your commercial material handling and operational needs. Fairchild Equipment is the Upper Midwest’s premier Material Handling Equipment and Service resource, with headquarters in Green Bay, Wisconsin, and numerous locations ready 24/7 to serve your needs throughout Wisconsin, Minnesota, North Dakota, Michigan’s Upper Peninsula and Northern Illinois. For more information or to discuss which equipment solution might be best for you, please call us at (844) 432-4724 or send us a message.