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Construction is one of the top industries for startups and among the fastest-growing. To handle all of the projects that construction businesses will bid on and win, special heavy-duty equipment is required. Construction equipment financing – also known as heavy equipment financing – allows the new or existing construction business owner to obtain equipment without having to purchase it outright. Even if the owner has the cash to pay for the equipment, financing may be a wise decision. By financing the equipment, the owner won’t have to drain the business’ cash reserves. The money can be retained for working capital or used for other business purposes. The financed construction equipment can be new or used, but in either case, it’ll serve as collateral. Leasing is another form of equipment financing.
In this article, we’ll discuss several methods for acquiring construction equipment, the pros and cons of each, and how to qualify for equipment financing.
Heavy-duty equipment generally refers to any equipment that’s used to perform heavy-duty functions in large construction projects. This type of equipment allows construction businesses to complete projects easier and faster.
The types of heavy equipment commonly used in construction projects include:
Before making the decision to buy construction equipment, it’s important to understand the value of such an investment. Construction business owners and fleet managers, understandably, want to get the most bang for their buck so there are several factors that should be considered including how much a piece of equipment typically sells for along with the weather conditions the equipment will operate in.
By paying attention to these factors and exploring the cost savings to be realized from used or leased equipment, owners/fleet managers can benefit from telematics when purchasing equipment. Telematics systems combine GPS technology, on-board diagnostics and monitoring sensors to track, log and report data via cellular networks on the performance and operation of construction equipment.
In addition to ensuring that a piece of equipment has all of the features needed to perform the type of construction projects you’ll undertake, consider the condition under which it will be used. For example, if rainy conditions are common throughout a particular job site, it may be necessary for equipment to be finished with rust-resistant paint. In freezing temperatures, the speed and strength of equipment can be reduced.
Just as weather conditions can influence the piece of equipment that’s needed to complete a job, terrain plays an equally important part in purchase decisions. Pay attention to how easy or difficult it is to navigate a job site. For example, wheeled machines work well on dry dirt or pavement but don’t perform as well on muddy surfaces. Tracked machines are best for muddy surfaces. Business owners who take these factors into consideration are more likely to acquire equipment that meets their needs.
To successfully complete projects, a piece of equipment doesn’t have to be brand new. Used equipment can allow you to acquire what you need much more affordably. There are businesses that are selling well-maintained used equipment for various reasons including going out of business or purchasing new equipment. Used equipment can be found at auctions and online marketplaces. If you belong to an industry organization, ask members for referrals to equipment sources since some sellers prefer to approach peers before listing their equipment in the secondary market.
When considering used equipment, the factors that will determine whether it’s a good purchase are durability and quality. Carefully evaluate the equipment to identify potential issues. When possible, ask to operate the machinery before finalizing the purchase. If any parts appear to be in ill repair, check to see how easy it is to find a replacement. You don’t want to buy a piece of equipment only to find that it’s nearly impossible to source replacement parts.
To ensure that your fleet is operating at maximum capacity, investing in telematics is a great idea. The telematics market for heavy equipment is expected to achieve a compound annual growth rate (CAGR) of 14.26% until 2026. Considering the benefits offered by telematics, this isn’t surprising.
Beyond the convenience of tracking an entire fleet in one location, telematics offers the following benefits of using this system to monitor and control heavy equipment:
Telematics data can show you how much each machine at your construction sites is being used. You can then analyze this data to determine if you’re allocating too much or too little equipment to a job site. For example, you may have a backhoe at a construction site that’s been idle for weeks. That piece of equipment could be of use at another site. Or, you may have a piece of equipment that’s being overworked because there isn’t enough equipment at the site. Telematics data will help you realize whether you have underused assets or whether it’s time to invest in more equipment.
By incorporating sensors and onboard scales into the design of new machines, manufacturers are providing equipment owners with even more data points to analyze. Everything from fuel consumption to error codes can easily be monitored.
Telematics data can be integrated into an equipment maintenance program to help the equipment owner better perform preventive maintenance and repairs. It can also be used to alert you when equipment isn’t operating at an optimal level, which could indicate that the machine is failing and needs to be replaced. By identifying problems early, you can extend the life of your equipment and reduce repair and labor costs.
Telematics data can help you monitor equipment operators and identify bad working habits like speeding and overloading machines which are safety hazards that can lead to rollovers and tipping equipment. By monitoring operators’ behavior, you can correct it and avoid accelerated wear on equipment and unsafe worksites.
With telematics and GPS technology, you can track and locate all of your equipment from one location in the event a machine goes missing. GPS tracking and geofencing alert you the moment your equipment leaves the job site. You can also use time-fencing to be alerted when equipment is being operated outside of scheduled work hours which could indicate that someone is trying to rip off your equipment. Some systems will even allow for remote shut down of the engine if unauthorized use is detected.
By monitoring the time that equipment is idling versus when it’s actually being used, you can identify which machines are being left on without any work being done. You can also identify which operators are responsible for leaving the machines on and wasting fuel. Reducing fuel consumption is one of the biggest financial benefits of telematics systems. Reducing idle times can also extend engine life and reduce repair and maintenance costs.
The government, both federal and state, collects excise taxes on gasoline and diesel fuel. These taxes fund road and highway construction and maintenance. Businesses that use fuel for off-road purposes, such as operating construction equipment, are eligible for refunds from the federal government and by many of the state governments. Telematics data can gather fuel consumption information for easily providing records of how much fuel was used off-road.
Similar to how insurance providers will reduce or eliminate deductibles or provide discounts if an automobile has GPS tracking, the GPS tracking provided by telematics systems will help to reduce insurance premiums on your equipment. Depending on the number of machines you have, this could result in substantial savings on your insurance premiums. By monitoring and correcting unsafe operator behavior, you’ll reduce the number of accidents on your construction sites, which could also lower your insurance premiums.
Telematics data can provide you with machine hours and fuel usage which can lead to precise job costing and estimates. This data can be combined with labor costs for more accurate billing. By analyzing data from previous projects, you can predict how much a specific job will cost on future projects. You can then have more accurate estimates and be able to submit more competitive bids.
The operating costs of your equipment – fuel consumption, preventive maintenance, operator wages, repairs – can be identified by telematics data. This data can help you identify areas where you can lower operating costs whether it’s by reducing idling time or correcting operator behavior to extend the life of equipment and reduce the frequency of preventive maintenance.
When a construction business owner has a better understanding of how equipment is being used at a site, it can lead to increased productivity at the site. For example, if telematics data shows that operator performance is such that equipment is being operated improperly, this performance can be corrected. If the data shows that equipment is being overworked or underutilized, you can better allocate equipment by either adding more equipment to a site or moving equipment to sites where it’s most needed.
Making the decision between buying new or used heavy equipment depends on what’s in the best interest of your business. Each purchasing option has its pros and cons. Understanding these will provide you with the factual and practical information you need to make an informed decision.
If you’re not faced with budgetary constraints, you’re highly likely to buy brand-spanking-new construction equipment. Who doesn’t want to have trouble-free machines complete with the latest technology?
Here are more pros of buying new equipment:
There are numerous pros of buying heavy equipment that’s brand new but there are also some cons. Here are a few downsides to take into account if you’re determined to buy new construction equipment:
Thanks to the vast inventory of quality machines, the used heavy equipment market in the U.S. is alive and well. Even if you have your heart set on new equipment, there are advantages to buying used that are too good to pass up. Here are some of the best reasons to consider buying used construction equipment:
When it comes to buying used equipment, the adage “buyer beware” definitely applies. If you’ve decided to invest in used heavy machinery, you must do your due diligence and make sure you know who you’re buying it from. Here are some disadvantages to buying used construction equipment from unfamiliar or unauthorized sources:
There are many positive things that can be said about ownership, but ownership isn’t always a good thing. When it comes to acquiring heavy equipment, owned equipment can pose a liability for your company and cost you in more ways than one. Here’s why leasing construction equipment is better than buying:
If you’ve already started looking into the price of heavy equipment, then you know that the cost can be prohibitive. If you buy the equipment outright, this can negatively impact your cash flow. If you can’t afford to pay upfront and decide to finance the purchase, interest charges will add to the overall cost.
Leasing equipment involves a fixed monthly payment. This arrangement is much more affordable for most construction/contracting companies. Since rental companies buy in bulk, they’re able to acquire equipment at lower cost and pass the savings on to customers. Your company can then get the equipment it needs in a way that works with its budget.
If you’re considering purchasing equipment, you’ll have to factor in the cost of depreciation. Purchased equipment, especially new, loses value very quickly during the early life of the machine. If you try to resell your equipment, you may find that it has little value. You may have to sell it at a much lower price than you anticipated.
Depreciation costs can also have an impact on your company’s tax obligation. You could encounter additional financial losses and have trouble recouping your original investment.
When you lease equipment, you don’t have to worry about depreciation. Depreciation is the rental company’s concern since they own the equipment. Your rental payments can be deducted from your business income as an expense.
Another factor to consider is that banks and other potential creditors view major equipment purchases as liabilities. Since they don’t view rentals in the same way, leasing equipment won’t affect your ability to borrow funds for other business purposes.
When you own equipment, you’re responsible for all insurance and maintenance costs. Since heavy equipment can cost thousands of dollars, insurance costs will be high. Each piece of machinery has to be covered in the event of theft or damage.
You’re also responsible for maintaining any equipment you own. This can include scheduled maintenance as well as unexpected repairs. If you have a large fleet of machines, maintenance costs can add up quickly.
When you lease equipment, you don’t have to worry about any of these extra costs. These costs are typically included in your monthly rental package. Maintenance and insurance aren’t free but your rental company can often add them at a substantial discount.
When you own machinery, you have to handle moving it from one job to the next. However, moving equipment from one job to the next isn’t easy. You may have to rent tractor-trailers and get wide load permits in some cases. You’ll also have to pay staff to load and offload equipment.
When you own, you’ll also have to store your equipment. If you don’t have room for storage, you may have to pay to rent secure warehouse space to ensure that your equipment is safe and protected from the elements.
If all of this sounds like more than you want to deal with, you should consider leasing equipment. Rental companies typically include the cost of transportation and storage in your monthly payment. You specify the start and end dates for your rental and the company will deliver and pick up the equipment. You won’t be hit with surprise fees for storage or transportation.
When you own construction equipment, it’s subject to federal and local regulations to ensure that your projects are safe. As the owner, you must make sure the equipment complies with these regulations. This means you may have to hire a compliance manager, train a staff member, or engage an expert.
Managing compliance can be expensive and nerve-racking. However, it’s essential that you make sure all of your equipment adheres to regulations. If you don’t, it could end up costing you even more.
When you rent equipment, you can leave compliance concerns to the rental company. A reputable company will make sure that all equipment it rents meets regulations including emissions standards.
Since buying construction equipment is a major financial investment, you’ll want to keep it for many years to come. At the time of purchase, you want the “latest and greatest” equipment you can get. If you opt for heavily used equipment, it might be cheaper but it won’t perform as well as you’d like. Instead, you need the latest technology that makes completing projects faster, easier, and safer.
You’ll also have to budget for upgrades when you buy equipment. If not, you’ll be forced to keep using old machinery even after it becomes obsolete.
When you lease equipment, you typically get the latest technology and the newest upgrades. The equipment offered by rental companies is usually no more than a couple of years old.
Having the right equipment when you need it will help you work more efficiently and complete projects on time. This will result in reduced overall project costs which you can pass on to clients by submitting more competitive bids. And, if you deliver on everything you promised after winning the bid, you will have created a satisfied client who will continue to bring you work in the future.
However, heavy equipment (such as the machinery mentioned above), can be quite expensive. If you operate a small business, it can be even harder to secure the machinery you need. Construction equipment financing is ideal for businesses that need to acquire equipment but can’t afford it or don’t want to pay for it in full. Although some of the same principles apply, heavy equipment financing isn’t the same as general equipment financing which is used for less expensive items like computers and office furniture.
Businesses seeking a heavy equipment loan can access financing in a variety of ways, including working with their local bank, obtaining a loan through an equipment dealer or manufacturer, or by using an alternative lender. Business owners may also want to consider pursuing a term loan, SBA 7(a) loan, or a line of credit.
With so many banks, credit unions, and other funding sources to choose from, it can be difficult to navigate the financing process and pick the best deal for your business. Let a finance broker like Opportunity Business Loans help you by connecting you to funding sources that best meet your needs. We can use our extensive network of lenders to find you the best deal. You’ll also receive guidance on increasing your chances of application approval.
Let’s take a generalized look at what it takes to qualify for construction equipment financing. Just as with other types of business loans, heavy equipment financing is only available to companies that meet certain criteria. Fortunately, the criteria aren’t prohibitively stringent because the equipment serves as collateral. If you default on the loan, the lender can seize and sell off the equipment to satisfy the debt. Since the lender has that security, they tend to provide favorable terms.
There are generally three factors lenders consider when deciding to approve a heavy equipment loan application. Those factors are:
If your credit score is above 600 and you’ve been in business for at least one year, you shouldn’t have a problem qualifying for heavy equipment financing.
If your credit score needs work but your business revenues are high (relative to the cost of the equipment you’re trying to finance), you can qualify for construction equipment financing based on your business’ cash flow.
Even if your credit and business revenues are only mediocre, you can qualify for heavy equipment financing by offering a down payment. For example, if you want to purchase equipment that’s valued at $50,000, and can make a down payment of $10,000, this can help you qualify for construction equipment financing.
Fortunately, construction business loans are flexible. Unless you have an open bankruptcy or non-payment of child support in your credit file, a lender will usually be able to offer you financing. Just be aware that your interest rate will reflect your creditworthiness. For example, if you have poor credit, you may qualify based on other factors but you’ll have to pay a higher interest rate because you’re considered a riskier borrower.
The amount of paperwork you have to submit will depend on the lender. Banks generally require a lot of paperwork, while online lenders require minimal documentation. Banks also typically offer better interest rates so there’s a tradeoff.
For heavy equipment financing, these are the documents often required:
Buying and financing construction equipment can be a difficult process, especially for a new business. Deciding on whether it’s best to buy or lease equipment and whether the purchased equipment should be new or used is a lot for a business owner to contend with.
For the business owner who decides to go the purchase route, finding the best financing option will depend on such factors as the owner’s personal credit history and the business’ profitability. Before signing a loan agreement, compare terms and rates from three or more lenders to ensure that your business gets the best possible deal.
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