Should you buy or rent equipment for your business?

If you are looking to start your own excavation company and don’t know whether to buy or rent equipment you aren’t alone. Don’t be fooled into thinking that you need to own so many different pieces to start a company. Focus on what the company is going to offer and look to invest in those pieces first. The only equipment that I started my business with was a truck, dump trailer, and skid steer. I planned on growing fast and buying all the other pieces that a dirt work guy needs sooner than later. As we have grown I realize that, maybe we don’t need to own everything. There is value in renting equipment that isn’t used on a regular basis.

Don’t think that money can’t be made operating with rental equipment. If you drive by big construction jobs whether they are on the highway, commercial buildings, or residentially, look at the stickers on the equipment. You may be surprised to see how much of the equipment has rental company stickers on them. Run out the numbers and figure what owning the equipment cost per hour, with insurance, routine maintenance, and fuel. If renting an excavator costs $2,500 a week, that works out to $500 a day, or $62.50 an hour. Now, figure out what owning the equipment might cost. Loan payment of $1,200/mo, insurance $75/mo, and repairs. Repairs are hard to quantify ahead of time but, general rules of thumb can be applied. A track machine repair costs are equal to the cost of a new machine over the life of the machine. For example, an excavator should last 10,000 hours and costs $80,000 new, divide 80,000 by 10,000. That should give the cost per hour in maintenance. In this case it costs $8/hr in repairs for an excavator. That same machine would need to have at least 24 billable hours per month before it starts making money. (62.5 rental rate-$8/hr repairs=$54.5/hr 1275 fixed cost per month/$54.5/hr=23.39 hours).

Renting should not affect the bottom line, as you should be charging at least a rental rate for equipment used on a job. The rental companies have done all of the research, in terms of how much it costs to run equipment with a profit margin. You should be using numbers that are very near what rental companies charge. Sure, you could make money charging less than they do, but what do you do when the equipment breaks down and you haven’t accounted for that? These are the kinds of expenses that can turn a good job into a bad one in a hurry. Expect the unexpected.

You can run a profitable business renting equipment. By renting equipment you are exposing yourself to much less risk, albiet potentiallly smaller profit margin. One of the benefits of renting that I haven’t mentioned and is a big factor is the opportunity cost involved with break downs. If you own the piece and it breaks down you have to fix it yourself. Often time this means waiting a day or more for repair parts to come in. Every day spent repairing equipment is one less day making money. Rental companies will deliver replacement equipment to the site and down time is much more limited.

Will owning the equipment help differentiate from the competition? If we are just looking at standard excavators, skid steers, bull dozers, or etc., I think that answer is no. All excavation companies own, or have access to, these pieces and owning them isn’t unique. Now, if you are thinking of going into a more unique application it may make more sense to own. For example, if you want to get into building docks from a barge, it might make sense to own a barge and excavator. The excavator can have the pile driving attachment on it that the rental company doesn’t offer. These types of brand differentiators are where you can and should invest money.

When deciding whether to buy or rent equipment take these factors into consideration. What will be the utilization rate, can you afford the opportunity cost involved with repairs, does owning equipment help differentiate from competition, are you capable of doing repair work, where will the equipment be stored? Renting equipment does not discount the legitimacy of a business. It lowers risk and initial capital investment, allowing you to concentrate on growing the business. You won’t have to take every job that comes your way just to make the payments. Renting allows for much more freedom to grow in the vision you have created.