Buy/Lease or Rent?

In the current economy, renting capital equipment such as lift trucks has become an attractive and viable option.

A lot of articles look at the pros and cons of buying versus leasing of material handling equipment. Renting seems to be a minor afterthought. However, given the economic climate over the last couple of years, plus the possibility of new accounting rules, renting has been gaining more status and is now being considered as much of a viable option as buying or leasing.

Buy/Lease vs. Rent
“Obviously, one benefit of renting over leasing or buying is that there is no long-term commitment,” points out Bill Rowan, president of Sunbelt Industrial Trucks (Dallas, Tex.). This is particularly attractive to companies that have seasonal businesses, where they need additional equipment one or two seasons a year. After each busy season, the company can turn the equipment in, and then rent it again during the next busy season.

However, according to Rowan, a potential downside for the customer to renting is that it is a bit more costly to rent month-to-month, compared to the long-term rate of a lease or buy arrangement.

According to Kenneth McDonald, president of M&G Materials Handling (East Providence, R.I.), renting is particularly attractive to customers that have a use for three months or less. “Cashflow-wise, if you rent for three months, it is about the equivalent of almost 12 months of a five-year lease,” he states.

Realities of the Current Economy
Recently, short-term rentals have picked up substantially at M&G Materials Handling. According to McDonald, a pick-up in rentals usually happens when customers lack a lot of confidence in the economy, such that they don’t want to make long-term commitments. “Customers are seeing that things are getting better, but they’re not sure things are going to stay that way,” he explains.

Heli Americas (Memphis, Tenn.) doesn't get involved with renting directly. That occurs through the company’s dealer network. However, according to Bruce Pelynio, president and CEO, “rentals will begin to pick up through the end of the year, and hopefully rates will recover with them. Customers that have trucks which they have had far too long may not be ready to pull the trigger on new trucks, but they will start looking at rentals for the interim, as a way to protect themselves if there is another relapse in the economy.” Then, in 2011, as long as the economy remains strong, Pelynio expects to see more customers going back to leasing and buying.

According to Sunbelt’s Rowan, customers typically look to the rental option in the type of economy that we are currently in. “They feel that their business is starting to bounce back up, but they are not confident enough to be willing to go into a multi-year lease,” he notes. “Renting gives them the ability to fill their current equipment needs, but without a long-term commitment.”

In addition, according to Rowan, renting is usually a good barometer of the new equipment market. That is, renting usually leads the way in an economic recovery. “Coming out of the economic environment we were in, if renting continues to see steady growth for six months to a year, we can anticipate that new equipment sales or leases will start to follow pretty quickly,” he states.

New Accounting Rule Possibilities
Currently, there is talk that the United States might adopt international accounting rules. One aspect of these rules is that leases must be included on balance sheets. With current U.S. accounting rules, leases can be expensed and stay off the balance sheet. If the international accounting rules are adopted in the U.S., is there a chance that customers will abandon leases for material handling equipment and replace them with rentals?

It depends on the type of customer, according to M&G’s McDonald. “If international accounting rules are adopted, it may not affect our business too much,” he states. “Currently, in many cases, leases are off the balance sheet and being expensed, so they are not being shown as long-term obligations.” He believes that the move toward international accounting rules is designed to create more transparency in terms of the stock valuations of publicly-held companies and how these companies report to shareholders and the SEC. As such, this may not affect most dealers who do business with customers that own privately-held businesses, whether large or small.

Still, for customers who want to move away from leasing in general and replace it with renting, there is what is called a ‘long-term rental.’ “This involves getting into a longer-term agreement, such as a one-year term, and then turning around and renting the equipment again for another year,” explains Sunbelt’s Rowan. In a long-term rental agreement, similar to a lease, the asset belongs to the dealer rather than the customer.

“In my mind, there is not a lot of difference between these two options,” Rowan says. “For accounting purposes, though, there might be a big enough difference where it would matter.”

The Future of Rental and Leasing
According to M&G’s McDonald, while capital leases are still being used these days, a lot of customers are becoming more interested in what is called a ‘true lease,’ which involves leasing an asset for a term, such as 36 months or 60 months. “At the end of the term, the customer returns the vehicle, rather than taking equity ownership of it,” he explains. “This is becoming very popular.”

One thing driving the true lease is customer concern over cashflow. Customers find it appealing to pay just for the amount of time they are using the asset. “While a lot of these types of leases aren’t showing up in this economy, I think they eventually will,” he continues. “True leases will continue to gain popularity in the future.”

William Atkinson is a freelance writer specializing in supply chain management.

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