Rental-Purchase Options Ease Financial Burdens of Equipment Ownership

When you’re hesitant to buy new equipment outright, a rental-purchase option can help you meet your immediate needs while reducing the amount of risk you take on

Rental-Purchase Options Ease Financial Burdens of Equipment Ownership

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Two years into business, Nor-Cal Pipeline Services of West Sacramento, California, got hired as a subcontractor on massive multimillion-dollar project that required a significant investment in new equipment.

To ease the financial burden of investing in so many expensive vac trucks in a relatively short period of time, Nor-Cal, which is featured in the November/December 2020 issue of Dig Different magazine, relied on rental-purchase options, or RPOs.

“Renting so many of the trucks helped us get on our feet quickly and build up some equity in the vehicles,” says Dave Jaeger Jr., who owns the company along with his father.

That strategy also helped the company avoid a costly situation: too many idle pieces of equipment after the project ended. 

“I absolutely was worried about that,” Jaeger says.

“The risk of downtime can be the most expensive aspect of a contractor’s business,” says Steve Shafer, president of Jack Doheny Companies.

Any contractor deciding between renting and buying should consider the length of the project they’re involved with and how much work they have available. That’s why RPOs can be attractive, offering both the short-term financial security of renting while also providing the potential of outright ownership. Shafer says that about 30% of the rental contracts through Jack Doheny Companies go out with a rent-to-purchase discussion included.

“We work outside the box — it’s not all black and white,” says Smiley Rich, executive vice president of the rental division for Custom Truck One Source. “We lay rental agreements out to how the customer would like to do it.”

While Custom Truck One Source does sell trucks, it is willing to rent out any piece of equipment in its $300 million inventory. The main consideration for any contractor between rental and purchase is obviously cash flow, but Rich makes clear that it’s not a this-or-that decision.

“If a company doesn’t have the capital expenditure money to spend right now, but they need units because they landed a big job, we’ll put the unit on a rental-purchase option,” Rich says. “At the end of that period, we apply a percentage of their rental expenditures toward the purchase, so they didn’t just throw away that rental money.”

Custom Truck One Source, like most distributors, will work with customers on a variety of rental periods.

“It depends on the company as to how they structure, whether they want to rent or lease, or just purchase outright,” Rich says. “They can customize the agreement as much as they want; they can structure it pretty much any way they want; they can do rent to rent or rent to purchase.”

One of the biggest differences between renting, rental purchase and straight purchase is maintenance. Most distributors will remain in charge of maintenance during a rental agreement, but not so for rental purchase or straight purchase.

That might seem like a clear-cut benefit: Why take on the responsibility of maintenance if you don’t have to? But there again, it’s a matter of preference. There are inherent speed bumps when you’re not in charge of maintaining your own equipment. It may limit your ability to control when and how maintenance is done or even whom it is done by.

On the other hand, it can be a serious benefit for small operations that might not have their own mechanics in-house or the infrastructure to make repairs anyway.

Another consideration is customization. For many vacuum excavation contractors, customization is the key to a profitable rig. Renting a unit limits your options. But if you make a commitment up front to purchase the unit, most distributors will work with you and build to spec.

Be wary, though — these are binding legal commitments that have serious financial consequences when shirked.

“If it’s a signed RPO agreement and there’s a minimum term, there is no getting out of it,” Rich says. “In many cases, there are minimum terms. Here’s how that works: Let’s say you come in and sign an RPO agreement clearly stating that you’re responsible for repairs and maintenance. So we say, ‘You have to give us a 12-month guarantee,’ which means if you don’t buy the truck, you have to keep it for 12 months.

“You can buy at any point: If you decide after the second month that you want to buy it, you can buy it — there’s no penalty. If you don’t buy it, then you still have to keep it 12 months. It keeps people from saying, ‘Hey Smiley, I want this vac unit in the rental fleet,’ so I drop in a half-a-million-dollar unit, and then they return it after two weeks. That’s not a good business plan.”

In the end, whether to rent or buy often comes down to personal preference.  

“Some people just want to rent, and in some cases, they rent it until it’s totally paid out and off they go,” Rich says. “Small companies starting out typically just want to rent. They have a job that may last three or four months, so they rent. At the end of the four months, if the job is over and they don’t have a next job for it, they return the unit. If they have a next job, they may decide at that point they want to put it on RPO. If they want to put it on RPO after they’ve had it three months, that’s fine.”

Rich says typical rental agreements run anywhere from three to 36 months, but they will even go out to 40 months or more in some cases. 

The last consideration to make is how flexible your distributor will be. See what changes they will allow down the road, and always make sure you know exactly what you’re getting into before signing on the dotted line.

“It’s simply a choice by the customer as to how they want to do things,” Rich says. “Some people don’t want to own things; some people don’t want to pay rent. But it’s always an option. We just try to structure the agreement based around the customer’s needs.”


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