Equipment Rental:Is Borrowing Best?
Is renting construction equipment the new wave of the future? While pride of ownership counts for a lot, renting can save companies from a financial burden.
Since 1993, the equipment rental industry has more than doubled in size-from $11.2 billion to $22 billion. Just 10 years before that, equipment rental was a $1.1-billion industry.
Industry experts say that a combination of factors is responsible for this sizable boost, most notably the construction booms of the late 1980s and mid-1990s. According to Fred Snow, president of Brandolini Company in West Chester, PA, the economic boom of the '90s increased construction projects and, consequently, the demand for equipment. Since equipment is expensive to buy, contractors turn to rentals to meet project needs. "During a boom economy you'll get a lot of landscapers and other small contractors who decide to get into the development business. That might account for the jump in equipment rentals. Also, bigger companies that own equipment will still rent for other jobs rather than move equipment from site to site." Snow also points out that there is a lot of equipment from the last boom in the mid- to late '80s that has aged. "It can be cost-prohibitive to replace this equipment so companies turn to renting as an option."
According to Mike Whelan, general manager of J.S. Cole Company in Newark, CA, the rule of thumb is that rental costs are 3-4% per month of the total purchase price of the machine. In the San Diego, CA, area, for example, a midsize excavator can be rented at Hawthorne Rent It Service for $475 per day, plus $300 for delivery and pickup (within a 20-mi. radius) and another 10% for insurance (unless the company has a certificate of insurance on file at the rental store). The longer the rental, the cheaper the per-day rate. At this rental store, the weekly rate is four times the daily rate. The monthly rate is three times the weekly rate, and so on. Hawthorne Rent It Service will also arrange for rental equipment to be moved from one job site to another. Depending on distance, this generally costs about $100.
With rental companies providing transport, pickup, and routine maintenance services, rental becomes the most hassle-free, most economical, and even safest option in many situations. Also, more and better equipment is readily available at local outlets in many markets. Same-day rental of heavy, light, and allied equipment and specialized tools is now possible.
J.S. Cole Company has 225 major pieces of Caterpillar equipment: large scrapers, wheel loaders, compactors, and excavators. It serves a niche market of mid- to large-size contractors that have a need for more equipment than they own for a short time-generally one week to six months.
"Our customers come to us because we have low-hour-rate equipment that is highly productive for them. They might own some equipment themselves, but the next job could break the camel's back. Rather than risk it, they'd prefer to have high availability," explains Whelan. He adds that his company will send a quality-control specialist for minor repair work. Customers are typically responsible for routine maintenance, such as greasing and oil changes; in some cases the dealer may provide this service. The dealer will respond to major repair jobs. Customers, however, are required to obtain insurance to cover the costs of damage from equipment abuse.
Whelan also notes that J.S. Cole's rental equipment puts on about 1,000 hours per year. "Although the useful life of most equipment is 10,000 hours or 10 years, we delete equipment from our fleet after 6,000 to 7,000 hours." This equipment, he says, is traded in to the dealer. When equipment is nearing the end of its useful life, the rental company may offer to convert it to a rent-to-own. In this case, when the subsequent rental payments equal the sales price, the customer takes ownership.
Allen Levenson, vice president of marketing for United Rentals in Greenwich, CT, points out that until recently it was difficult to find good rental equipment. "The rental industry has changed a lot over the past few years. The industry has experienced phenomenal growth driven by the availability of more and better equipment." He also states that in the past, the industry was fragmented. "As larger rental companies bought up small mom and pop stores, it became easier to raise investment funds to boost the rental fleets." He reports that United Rentals is now the largest equipment rental company, with 512 branches throughout the United States and Canada.
Today there are more rental stores and rental equipment available thanks to the economic advantages of renting.
A factor that once affected rentals was the stigma assigned to rentalequipment: You had to own our own iron. But when the trend toward corporate outsourcing hit the industry, this stigma disappeared. As a general contractor, Snow indicates, "The only thing we're concerned with is if [the subcontractors] have enough equipment and enough manpower to get the work done. We have no control over whether our subs rent,own, or own-to-lease equipment."
Levenson says that the decision to rent will depend on an individualcompany's circumstances. For the most part, companies are better off renting if the equipment will not be fully utilized under normal operations. "Utilization rates have to reach 50 to 80 percent to take into account all the costs of ownership and still pay out."
Some companies, however, would rather rent equipment than take on additional overhead, because rentals are always working. Whelan points out, though, that equipment is only overhead when it's sitting around. "As long as it's working, it's not overhead."
Levenson summarizes why companies rent in terms of cost savings and operating advantages:
- Cost Savings. Generally lower cost when downtime, service and maintenance, and other ownership costs are taken into account. No costs while equipment is sitting idle. No parts inventory required. No service and parts invoice processing costs. No warehousing and storage costs. No equipment disposal costs. Generally, tax savings.
- Operating Advantages. If equipment breaks down, factory-trained technicians fix it immediately. Latest technology for application, increasing productivity. New equipment results in satisfied operators. Rental company moves equipment from site to site. It's difficult to attain critical mass on service. No work-rule issues. Opportunity to try different brands or types of equipment.
Levenson also indicates that there are a number of financial advantages to renting equipment. Renting frees up capital to invest in your primary business, it requires no down payment, it increases borrowing capacity since equipment does not appear on your balance sheet, and it increases your cost control since it can be difficult to know the true cost of ownership.
On the safety side, Levenson points out that rental equipment receives routine preventative maintenance and is compliant with all OSHA/ANSI regulations.
He cites maintenance costs as the primary reason why there is a trend toward long-term rentals. According to Levenson, some corporations are selling off their fleets to rental companies, then renting them back. "Maintaining equipment in-house, particularly where labor rates are high, can be very costly." With rental, you do not have capital tied up in inventory, and there is no downtime from mechanics' vacations.
Rental has its downsides, though. According to Brad Phillips, co-owner and vice president of Phillips Excavating in Alpha, OH, you lose control over your equipment when you rent. "I'd hate to be totally dependent on a rental company for all of my equipment needs." Phillips remarks that in his area, rental equipment is not always available when he needs it. He also notes that if equipment breaks down you are at the mercy of the rental company to service it. If the company is short on service technicians, it can take a few days. He stresses that rental has its place in every business, though. Phillips Excavating will rent certain equipment-hand tools and sometimes used specialty equipment, for instance. As a rule of thumb, if equipment will only be used for one month out of the year, Phillips will consider renting it. With a 12-bay garage and six full-time mechanics, service is not an issue for this company. Its mechanics are all certified and receive regular training from the dealer. Storage is not an issue either. Situated on 80 ac., Phillips Excavating has plenty of land to store heavy equipment. Because of its size, the company can also afford six tractor-trailers that are used to move equipment around. "[Moving equipment] is a cost of doing business."
Phillips Excavating puts about 1,000 hours per year on its equipment. It doesn't hold on to equipment through destruction. Phillips remarks that even though they don't always have the latest piece of equipment, they are not at a disadvantage.
"I know that some companies will go out and literally rent everything, but [during the construction] season, you just can't get the equipment." It comes down to having the means to get things done. "With rental you have no control, not like owning," he points out.
Availability of equipment is changing, though. With demand for short-term rentals at an all-time high, Caterpillar Inc. in Peoria, IL, launched the Cat Rental Store in 1998. Although Caterpillar dealers have traditionally offered long-term, rent-to-own options, the manufacturer asked its dealers to set up stores focused on short-term rental. As a result, 220 Cat Rental Stores are open throughout the US and Canada. Mike Bruch, rental services consultant with the North American commercial division, notes, "Our dealers are in the business of distributing Cat equipment, and rental is one means of distribution."
For the most part, the only place you can rent Caterpillar equipment is at a Cat dealer. "We needed to offer short-term rental to compete with the other rental houses," says Bruch. It is now possible to rent Caterpillar backhoe loaders, telehandlers, wheel loaders, excavators, skid-steer loaders, and compactors directly from Cat Rental Stores on a daily, weekly, or monthly basis. In addition to Caterpillar equipment, the stores also offer all types of allied products, such as air compressors, light towers, trenchers, aerial work platforms, and small compaction equipment.
Service on Caterpillar rental equipment typically occurs the same day, even within a few hours. Since the equipment at the Cat Rental Stores is newer (it's only held for about three years before it's sold) and well maintained, typically there are not a lot of repairs required. If it does break down, a Cat technician will be out within three to four hours, states Bruch.
He says that the quality of rental equipment was much different in the past. The rental industry offered much older, less reliable equipment, typically holding on to it for five, seven, even 10 years. There was also a problem with the equipment not being there when you needed it.
Today there are more rental stores and more rental equipment available to contractors. Although Bruch admits that the potential for equipment not being available is still there, he said it's happening less and less. "To compete, you have to have good availability."
He believes that rentals are increasing because customers are getting smarter about how they manage their assets. He says that in the past, a lot of companies owned their equipment when working on large construction projects. "They had a lot of spare equipment that they used as backup." There's a lot of pride in owning a piece of equipment, but the trend to realize the economic advantages of renting is changing that.
Bruch also indicates that the advantages of renting will trickle down to smaller and smaller customers. Smaller contractors can "size themselves up to a new job" by renting equipment, he says. Because of the availability of newer and better equipment, it helps the smaller companies that do not have the capital to purchase equipment-particularly the companies that are doing a lot of different jobs.
K&G Contractors in Idaho Falls, ID, benefited from the expanding rental market. According to Larry Schuldt, owner and president, after doing the math on renting a backhoe versus purchasing one with dealer financing, the company opted for a five-year rent-to-own contract. Since 97% of the rental cost will be applied to the final purchase, Schuldt is looking at what amounts to a 2% interest rate compared to an 8% finance charge for buying the equipment. In addition, the backhoe comes with a five-year warranty on everything except the tires, glass, and hoses.
K&G also opted out of the routine-service contract. Schuldt explains that the rental store provides them with all the filters they need at the first of each year. Instead of paying $100 per oil change, his crew changes the oil and filters. For repair work, he says that when a water pump busted on the backhoe on a Friday, the dealer was out first thing Monday morning to fix it.
Schuldt, who owns most of his equipment, remarks that in the past, the available rental equipment tended to break down right away on the job. "Now I can get equipment the same day if I need it." He notes that just about any equipment he needs is available, although he also calls on other small contractors that have the equipment to fill in on occasion.
Owning most and renting some of your equipment appears to be a popular combination. According to Mike Chapman, president of Carter Excavation in Brewster, WA, "If you can't utilize it, it's expensive to own." He points out that the company geared up to its current level three years ago. Equipment needs have focused on replacing older equipment. Instead of purchasing, however, Carter Excavation entered into Rental Purchase Option (RPO) agreements upfront. Chapman says that after he looked over all the options, RPOs made the most sense for his company.
On the short term, Carter Excavation rents tools and allied equipment, such as plate whackers and trench whackers, as needed because the availability of rental equipment is better than it was five years ago, even though the nearest rental store is 30 mi. away. States Chapman, "We can usually call the night before and they'll have what we need."