Forklift Lease vs Buy Guide

by / Friday, 21 August 2015 / Published in Guides

forklift-lease-vs-buy

One of the questions we are asked the most is “should I buy or lease forklift equipment”. The correct answer is: It depends. Below, I’m going to lay out the scenarios where it makes sense to own and when it makes more sense to lease. I want to cover this question in depth because this is one of the biggest areas where I see companies wasting thousands of dollars a year in hard earned profits.

Some lift truck fleet owners like to hang onto their equipment until it falls apart and is basically scrap metal. “Squeeze every dime out of it”, is their motto. This is an excellent strategy in a very limited number of businesses.

Lease vs Buy

The basic rule is if the item will increase in value then I should own it, if it decreases in value then I should NOT own it, but simply lease or rent. Since forklift equipment decreases in value, then as the rule states … a company should lease or consider a forklift rental. Not so fast, this rule is not always 100% accurate in regards to forklifts.

Let me save you a lot of time…

If you meet the requirements of the following scenario, stop reading, and buy forklift equipment.

Scenario #1: BUY YOUR FORKLIFT

You use a forklift infrequently. You do not have a severe environment. You can operate the forklift equipment for 7 to 10+ years while incurring relatively little maintenance expense, and you have an excess of capital.

If you can’t pay cash for it, you should scroll down and read the short section on $1 buyout and fixed purchase option leases.

When to buy a forklift?

  • You use the product less than 1,000 hours per year or have low or unpredictable utilization
  • Your equipment has low service and repair requirements
  • No issues with capitalization and depreciation of the assets

If you don’t meet these criteria, and most companies don’t, then you should consider leasing. More than 75% of all new forklifts that Forklift Systems sells are leased. This percentage is very consistent with other major suppliers of forklift trucks. The Small Business Administration estimates that more than 80% of U.S. businesses lease some equipment.

Scenario #2: LEASE A FORKLIFT

Your company operates a forklift more than 1500 hours per year. You feel confident that the intensity of your operation will not decrease in the foreseeable future. You should consider leasing a forklift for 48 months to 60 months.

forklift-lease-checklist

When to lease a forklift?

  • Companies with high cycle operation that operate the equipment more than 1500 hours per year
  • Where you have a predictable utilization
  • High service and repair parts requirements
  • Potential for change in your product specifications
  • Capital budget constraints
  • Desire for off-balance sheet transactions

A recent Gallup survey found that 80% of U.S. businesses lease a portion of their equipment. The list of companies using leasing ranges from the Fortune 500 to mom and pop shops. Leasing is the fastest growing and largest external source of capital investment in the United States and throughout the world.

Leasing, is it right for all businesses?

The answer is NO it is not right for ALL businesses, but YES it is right for MOST businesses. Here are the biggest questions to ask yourself when considering leasing forklift equipment.

  • What will happen to the equipment’s value as time goes on?
  • Will it appreciate or depreciate?
  • What will the value be at the end of the economic life cycle?
  • How long can I use the lift truck before I incur substantial maintenance costs?
  • Will the equipment remain functional or become obsolete before the end of its useful life?
  • Will increased downtime and expense be acceptable as the forklift ages?
  • Can I devote more time to the upkeep of the fork lift fleet in the future?
  • Can my capital or credit line be better used to grow my business?
  • What is my business tax situation?

An alternative to ownership

Leasing allows businesses to acquire a significant asset without a down payment. You pay for its use out of your operating budget, not from capital reserves. And at the end of the lease term, businesses may buy the lift for a fraction of the original cost, upgrade to something new, extend the lease at a reduced rate, or return the equipment and simply walk away.

Scenario #3: LEASE A FORKLIFT

Your company operates a forklift for multiple shifts or more than 3000 hours per year. You feel confident that the intensity of your operation will not decrease in the foreseeable future. You should consider leasing forklift equipment for approximately 36 months.

What are the advantages of leasing for your business?

Leasing advantages include: making lower monthly payments than you’d have with a loan, getting a fixed financing rate instead of a floating rate, benefiting from tax advantages, conserving working capital and avoiding cash-devouring down payments, and gaining immediate access to the most up-to-date business tools. The equipment also shows up on your income statement as a lease expense rather than a purchase. If you purchase it, your balance sheet becomes less liquid.

Not properly managing the life cycle replacement of equipment is one of the most costly mistakes I see companies make daily. Leasing can be an excellent tool to manage life cycle replacement. In the future, I will be covering this problem in detail.

In a nutshell:

  • Leasing minimizes the demands on cash flow
  • Leasing eliminates investing in obsolescence
  • Leasing keeps your bank credit lines open

So what is the downside of forklift leasing?

Leasing also has its downsides. Because of interest costs, you may pay a higher price over the long term than paying cash. Another drawback is that leasing commits you to retaining a piece of equipment for a certain time period, which can be problematic if your business is in flux. If the lease is not tailor-made to your application, you could owe for overtime or abuse charges at the end of the term (on non-ownership or full payout leases).

What’s in it for your business?

forklift-lease-buy

Low Monthly Payments

Leasing gives you use of the forklift without having to wait to pull the full cost of the equipment together and often requires lower payment than other methods of financing. Best of all, you can often afford higher quality lifts that are more cost effective to operate.

Acquire Forklifts Without Tying Up Capital

Where other types of financing require a hefty down payment, leasing is 100% financing. Most lease agreements require no advance payment. Occasionally, one or two month’s advance payments are needed. Leasing puts the equipment to work for you immediately, at a minimal up-front cost.

Protect Your Lines of Credit

Lease payments have no impact on your credit lines with your bank. Your borrowing power is preserved for other business opportunities.

Maintain a Competitive Edge

The latest and best forklift equipment lets you do the job faster, more efficiently and cheaper than the competition. Leasing gives you the advantage of the latest available technology at a more affordable cost.

Eliminate Obsolescence

By leasing you can acquire the equipment you need today and use it cost effectively until it no longer meets your needs. You can then upgrade and avoid dealing with outdated and obsolete equipment.

Take Care of the “Hidden Costs”

Leasing gives you more than just the equipment. It also can cover the cost of delivery and installation. Your lease includes everything it takes to actually put the lift truck to work for you.

Tax Advantages

When structured properly, a forklift equipment lease agreement may allow you to receive tax benefits such as treating the lease payment as an expense. Any asset that depreciates in value should be leased so you can write it off quicker against anticipated profits.

Simplify Accounting

Lease payments are little more than a line item in your monthly cost of operations – a minimal bookkeeping effort that frees you from time-consuming depreciation schedules.

Makes Future Budgeting Easier

The lease signed today remains fixed in today’s dollar and at today’s rates. As a result businesses are better able to budget future operating expenses.

Guard Against Market Conditions with a Fixed Payment

Remember 1980, when interest rates skyrocketed from 9% to 20.5% in a single year? Unlike bank lines of credit, with variable rates, lease payments are fixed – no matter what happens to the market tomorrow.

Leasing Adds Up to Good Business Sense

A properly tailored lease program gives you the benefit of having the equipment you need without all the risk and financial pressures.

Fortunately, it’s easy to understand the benefits of leasing. There is a wide range of leasing programs that offer plenty of flexibility and choice. The programs are designed to meet the various business needs of today’s forklift fleet customers. Some of the most popular programs are featured below.

Which Program is best for your company?

Considerations Cash Finance Lease Rental
Prefers Ownership  YES  YES
Prefers Option of Ownership  YES
Use For Specific Contract & Return  YES  YES
Doesn’t Affect Up Lines Of Credit  YES  YES
Doesn’t Affect Debt Ratios YES  YES  YES
Off-Balance Sheet Financing  YES  YES
100% Financing  YES  YES
Unlimited Cash Resources YES  YES
Limited Cash Resources  YES  YES
100% Tax Deductible  YES  YES
Prefers Low Monthly Payment  YES

* Be sure to consult your tax accountant for your specific tax situation

What are the Different Types of Leases?

Operating Lease

This is the most common type of forklift leasing. This is a lease where the company is shielded from the drawbacks (and benefits) of ownership. These leases are better for equipment, which may have a shorter shelf life (like fork lifts in higher frequency operations), or equipment the company doesn’t want to retain past the term of the lease (because of excess maintenance costs), etc. Commonly used terms for ‘operating lease’ are FMV, Tax lease, or True lease.

FMV: Tax or True Lease

FMV Leases are operating leases. This is where the company is not 100% sure if they want to keep the equipment. They lease it for a certain period of time, and at the end of the lease, they can either 1) Buy the equipment at fair market value; 2) Give the equipment back; or 3) re-lease the equipment.

Features and Benefits

  • Level monthly payments
  • Option to purchase for a fair market price
  • Business may claim payments as expense (subject to advice of tax advisor)
  • Payment of unit over time
  • May provide planned replacement
  • Fixed costs aid budgeting
  • Optional ownership
  • May provide tax benefits and minimize or negate the impact of AMT
  • Conserves working capital
  • At term end, forklift may be replaced with new unit
  • Lower monthly payment

Capital Lease

This is a lease where the company gets the benefits (and drawbacks) of ownership. Capital leases are usually used for equipment where the company will likely (or must) buy it at lease end. Common terms for ‘capital leases’ are Full payout lease, $1.00 purchase option lease, and forklift lease to own option.

Full Payout / $1.00 Buyout Option

$1 Buyout Leases are capital leases, and are great when a company wants the tax advantages of Section 179 but is also pretty sure they want to own the equipment when the lease term is over. The business secures a forklift for lease, and at the end of the lease term, the company then buys it for $1. Full Payout and $1 Buyout Option leases are available for both new and used forklift financing.

Features and benefits

  • Level monthly lease prices
  • Depreciation and interest deductions claimed by the company (subject to advice of tax advisor)
  • Payment of forklift over time
  • Fixed costs aid budgeting
  • Business takes full advantage of tax benefits
  • Conserves working capital
  • Fixed price purchase lease option

Fixed Purchase Option Leases

Fixed purchase option leases are similar to a $1 buyout because the company can buy the equipment for a predetermined cost (examples: 10%, 20%), which is a percentage of the original price, and still provides a lower monthly payment like an FMV. You still retain the option to renew the equipment lease, or return the equipment at end of the lease agreement.

Features and Benefits

  • Level monthly lease rates
  • Option to purchase for a fixed price
  • Company may claim payments as expense (subject to advice of tax advisor)
  • Payment of lift over time
  • Fork truck may be returned at lease end
  • Fixed costs aid budgeting
  • Optional ownership
  • Business takes full advantage of tax benefits
  • Conserves working capital
  • Pay only for forklift use

leasing-new-forklift

Other Lease Types

Accelerated Payment Leases

Accelerated Payment Lease – Monthly payments are higher in the first year and decrease annually over the life of the contract to better align payments to maintenance costs. If you perform your own forklift maintenance, this might be an attractive option for you. This can be used for both operating or capital leases.

Skip Payment Lease

Skip Payments – If your business is cyclical or seasonal, this option allows you to synchronize your payments with your cash flow. A skip program is typically limited to 3 skip payments a year. This can be used for both operating or capital leases.

How to determine if the lease is right for you?

Every lease decision is unique, so it’s important to study the lease agreements carefully. Compare the costs of leasing to the current interest rate, examining the terms to see if they’re favorable. What is the lease costing you? What are your savings? Compare those numbers to the cost of purchasing the same piece of equipment.

How many years do you plan to operate the equipment? What is the estimated cost of maintenance during this time? What is the economic life of the equipment? Consider all these factors and you’ll quickly see which is the most profitable route.

Close-End Lease versus Open-End Leases

If you decide to lease, make sure you get a closed-end lease without a balloon payment at the end. With a closed-end lease, nothing is owed when the lease period ends (unless there are repairs to be made or damage to the equipment). When the lease period terminates, you just turn the equipment in and walk away. This is how most forklift leases are structured today, and all Forklift Systems leases are structured.

With an open-end lease, it’s not that simple. If you turn in the equipment at the end of the lease and it’s worth less than the value established in the contract, you’re responsible for paying the difference. If you do consider an open-end lease, make sure you’re not open to additional charges such as wear and tear.

Who will experience difficulty in obtaining a lease?

Because they tend to have little or no credit history, startups often find it difficult or even impossible to lease equipment. However, some companies will consider your personal rather than business credit history during the approval process. Based upon the conditions, at times, Forklift Systems has agreed to guarantee a startups lease in order to help them obtain business credit.

If you have had a business bankruptcy in the last 3 (sometimes up to 5) years, you will find it extremely difficult, if not virtually impossible to be approved for a lease. Sometimes, leasing companies will consider personal and/or parent company credit history during the approval process.

Where can you find a lease?

There are many different avenues through which you can secure an equipment lease:

  • Banks and bank-affiliated firms that will finance an equipment lease may be difficult to locate, but once found, banks may offer some distinct advantages, including lower costs and better customer service. Find out whether the bank will keep and service the lease transaction after it’s set up.
  • Equipment dealers, such as Forklift Systems, and distributors can help you arrange financing with the manufacturer’s captive lease company or by using an independent leasing company. Often, manufacturers will subsidize lower interest rates or higher residuals resulting in the lowest forklift lease cost. For Instance, Nissan forklift and UniCarriers Forklift has close associations NMAC and DLL, while Doosan Forklift partners with DLL also.
  • Independent leasing companies can vary in size and scope, offering many financing options.
  • Captive leasing companies are subsidiaries of equipment manufacturers or other firms.
  • Lease brokers represent a small percentage of the leasing market. Much like mortgage or real estate brokers, these people charge a fee to act as an intermediary between lessors and lessees. Sometimes needed in poor or no credit situations.

Leasing Resources:

Equipment Leasing and Finance Association: http://www.elfaonline.org/

Small Business Administration: https://www.sba.gov/content/leasing-business-equipment

Equipment Leasing and Finance Foundation: http://www.leasefoundation.org/

Please note:

The information contained herein is not to be considered definitive tax, accounting or financial advice. The customer should have their tax advisor or accountant review all of the lease classification options.

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3 Responses to “Forklift Lease vs Buy Guide”

  1. I love the comparison that you have done of purchasing vs. leasing a forklift – well done. Thanks for sharing!

  2. We previously wrote an article about leasing vs buying forklifts but this guide is definitely more detailed and in-depth than ours. Thank you so much for providing such good information! 🙂

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