I am trying to get an idea of what percentage of the industry pays cash for their equipment rather than using financing. What are some of your views on this subject? All comments are welcome, hope to hear back.... :usa :usa
Hello Smartguy.I can hardly be considered a construction company,as it is more of a sideline to my mainstay of trucking,but I'll throw my 2 cents in anyway. My business could not exsist without equipment financing.I've financed all of my tractors(semi's),by either my bank,or with the financing offered by the truck maker. I purchased my first truck used,through a dealer,and they gave me their financing.My bank would not help me out,they thought it was too much risk.Freightliner would,but they charged me 13% interest.(in 96) I went for it anyway,I just wanted to be in business that bad. The interest rates have dropped since,as I'm not the risk I was then,now being established,and also interest rates have dropped in general. I actually had the pleasure of telling Volvo financing what they'de have to give me in terms of interest,and length of payoff,if they wanted to sell me my Mack truck in 03.At first they seemed reluctant,but I didn't care that much if didn't get the truck,so I told them if they couldn't meet my terms they could keep their truck.A week later,after not hearing back from me,they called to say they could do it.(it even suprised me!!)I wanted 6years(72 months)and less than 7%.6 years is long for a truck,but I don't put on alot of miles anymore. The semi is 90% of my business.Everthing else I own(except my house)was paid for with cash.Maybe some day I'll be able to pay cash for the trucks too.......A BIG maybe!!
cash maybe for a attachment, but we finance all machines and trucks
I heard plenty of folks argue cash is the only way to go, but I'm one of those that will tell you to finance if it makes sense. Financing allows me to purchase things now when I need them and pay them off over time. If I waited to pay cash, it'd take forever to save enough money to pay cash for the big things I need now. The only caveat being you need to keep a reasonable debt to income ratio. Without financing, it makes it difficult to grow a business. Personally, I think cash is best used for small items/equipment or consumables. Typically things that fall in this category are: fuel, oil, office supplies, business licenses, hand tools, etc.
Started out as most with financing. when ever I got paid off a big job (>$5000) I would put all of it in the bank and take a loan out aginst it to pay overhead on that job. Then I had a payment to the bank to pay back the loan. Built my savings that way. Now when ever I need a piece of equipment I can barrow aginst my savings @ 1% interest. If the equipment co. I am buying from offers less then 1% interest then I will use there money. If not I use mine. I always stay in dept. That is to say if I don't owe anyone I take out a loan aginst my savings and add the loan amount back to my savings like a forced savings account. I have also found that the bank can't turn you down that way and it only takes about 2 hours to get the loan. Dwan
I finance my equipment too. Even if one could afford to pay cash, with the interest rates the manufacturers offer, it often doesn't make sense. If you can get a lower interest rate on the loan than you get from your savings account, why not use their money? Plus, the interest paid is tax deductible and helps you out at tax time.
I finance as well, for the same reason Steve mentioned. A place where I have bought equipment from often will let you "rent" the piece to get started on a job and then apply that rental fee as a payment if you keep the piece. This is how I ended up purchaing the tractor I got this year. I needed it for a big job, wanted one, but wasn't sure I could justify it. As I was using it to do the job, I picked up three more similiar jobs that sold me on adding it. I have a cutoff line of $5,000 for financing though. I just bought a new sander (on a credit card) and paid it off in two months. They would have financed, but rates on smaller stuff is not that great and easier to me just to have paid for it.
Equipment Generally, how many pieces of equipment do you guys buy in a year?
Year 2004,== 975 Bobcat used, Bomag 100ADL used 2004 Elgin aircub new, 1963 Aistin Western supper 300 used. total 2004 = $110,000.00 Year 2005 == 2004 F350/Boss plow 4x4 flatbed new. Poly Hawlk sander new, Equipment trailer new, 2 ea parking lot paint sprayers, 1998 Maxi road sweeper used, coverit storage tent for sand, 29" motorhome, total 2005= $105,000 and the year is not over yet. I am in the market for another Elgin Air Cub sweeper. The air cub and 2004 F350 were financed by using my savings @ 1% interest for 2 years each.
We pay cash for everything. unless cat has 0% interest. even then its only on the smaller equipment. The dealer was laughing cause they have never gotten a check for a 365C the day it got picked up but its paid for and the fact it has been parked for the last 6 months doesn't hurt as bad as if we still had to pay $15000 a month note on it. That is the way to do it tho our attitude is if we can't afford it don't buy it yet. we waited about 5 years to get that machine but now no one can take it from us thats 700,000 we paid for and own.
Largest companies in the world use financing. It is part of business expenses. If you finance make sure you have a need for it and it will make you money. Also try to put a decent down payment if things go bad you can bail on it and not be in a hole after you have nothing. Cheap rates now available it really pays to use their money. I try to put 25% down so I have some equity in it at all times even if I dumped it the day after and was left with a dollar.
I am working toward being debt free. It is a tough thing to say no to equipment sometimes when a "good deal" is to be had, but having been in a bad economic situation with too much debt has taught me to be much more careful about financing anything. My favorite way of purchasing equipment is working with a dealer which rents. I have made the deal, rented the equipment for say 6 months. If I see I can keep it busy or the job profitability is enough to cover the purchase then I buy it and they apply all my rent to the price we agreed upon at the beginning. I really hate working for the bank, but it is a necessary evil I have to do. Hopefully not forever.
I got one for you guys to consider. Im currently working for a small company. They have two pieces of equipment. They own a cat 430D backhoe. They just paid it off last year. They have purchased a used linkbelt 2800Q. Now heres the catch, they are actually leasing to own, with the help of a leasing company. The reason they are doing it this way is because the machine is older, so it cant really be written off at this point. But by running it through a leasing company, the payments are a write off. I know several large companies that work this way. The only exception, is they own the leasing company they are using. In all reality, its a giant shuffle of dollars. The leasing company will show a loss for as long as they can, go out of business, and sell the equipment to a new leasing company. One company I worked for had itself split every which way. One company owned the name they worked out of. They had another company name that owned the office, another one that owned the shop, another that owned the real estate, and two that owned the equipment. Not really sure if it was all for tax purposes, but if you think about it, if you ever have something go wrong, and get sued, it isolates the company in such a way that you wont loose everything.
My brother works fow HRI as an engineer in Pa and they are a big company and they are owned by COLAS which is owned by Bouygues Group which is the LARGEST CONSTRUCTION COMPANY IN THE WORLD. ALL THOSE COMPANIES ARE 100% DEPT FREE. They buy everything with cash. OUR rule of thumb is never rent money for more then 6% interest. As a matter of fact I am pretty sure we are financing a couple pieces for 0% right now.
I think this is a 6 to one 1/2 dozen to another type deal. Now when you borrow money lets say it costs you 6% apy, ok. That means on a 4 yr deal the machine actually costs you 24% extra. So if you paid cash your operation is 24% more profitable. Now tax plays into that and you can write stuff off, so my numbers are not completely true. With that being said you have to get your start somewhere.
I own all our equipment and will pay cash only for machines. I have financed alot of machines in the past but when the **** hits the fan its not pretty when you cant keep up with the payments.
Puts you in a good position too. When bozo down the street is working dirt cheap to pay his bills, your iron can sit. I get a kick out of these guys out there that will work dirt cheap to begin with, then when they end up owning their iron, they work even cheaper. None of them figure out you need to make enough per hour off of a machine to pay for repairs, or the machine that will replace the one they are using.
Yeah we just got a steal of a deal on our shop because a company went under for working for nothing. I think they financed all the equipment as well. I feel safer owning my equipment from day one, after all it only takes one bad year to lose everything. Which was the case with these guys, the owner was in his 70's and he lost it all.
If you finance a ton of equipment and things slow your probably going to be in trouble. If your not over extended you should make it. There are and were a bunch of people here who did finance 5 out of 6 pieces in their fleet and that is nuts. When I was real busy in the 80's I bought a ton of stuff and paid it off in 3-4 years. I am still using most of it now. Great feeling when it is paid for. If your buying something you have to have a feeling it will be in use enough pay for it, otherwise rent. My stuff was long paid off but I still put money into the jobs for daily use of it and to maintain it. Business is always a bit of a gample but you don't want to sit home saving for a piece of equipment and have nothing. You are gambling you buy it and it makes you a profit. You just want the odds in your favor as much as possible. The dollar you pay back in 3-4 years will not be worth what it is today so that takes something off the cost of a loan also.