Is a forklift lease right for you?
When your operation needs to add a forklift, one of the earliest decisions you’ll face is “should I buy, rent or lease?” This post will focus on the lease versus buy decision and explain the advantages of the primary types of leases.
To buy or to lease? That is the question.
Not to get all Shakespearean on you, but the decision of whether to buy or lease forklifts is important to your organization's finances. The basic rule is that if an item will increase in value, buy it. If it will decrease in value, then lease (or rent.) However, this rule is not 100% true when it comes to forklifts.
BUYING a forklift makes sense if:
● You use a forklift infrequently (less than 1,000 hours per year) or have unpredictable utilization.
● You do not have a severe environment.
● You can operate the forklift equipment for 7+ years without major maintenance expense.
● You have an excess of capital.
● You don’t have issues with capitalization and depreciation of the assets. (Check with your accountants)
LEASING makes sense if:
● Your company operates a forklift more than 1500 hours per year.
● You believe the need for a forklift in your operation will not decrease in the foreseeable future.
● Your utilization is predictable.
● You anticipate a need for significant maintenance (due to environmental factors or utilization).
● You have constraints on your capital budget.
Leasing allows businesses to acquire significant assets without down payments. The equipment’s use is paid for out of the operating budget, not capital reserves. At the end of the lease term, there are options: buy the forklift for a fraction of the original cost, upgrade to something new, extend the lease at a reduced rate, or return the equipment.
Other advantages include:
● lower monthly payments
● fixed financing rate
● tax advantages since payments can be expensed
● conserving working capital
● access to up-to-date business tools
Of course, leasing has downsides. Because of interest costs, you may pay a higher price over the long term compared to buying with cash. Leasing commits you to retaining a piece of equipment for a certain time period. This can be a problem if your business is in flux. And if the lease is not tailored to your application, you could owe overtime or abuse charges at the end of the term.
You should always consult with your accountants when making a lease versus buy decision for capital equipment.
Types of leases and how to choose
There are two main types of lease.
1. Operating Lease
This is the most common type of forklift lease. With an operating lease, the company is shielded from the drawbacks (and benefits) of ownership. Operating leases are better for equipment with a short shelf life (like forklifts in higher frequency operations), or equipment the company doesn’t want to retain past the term of the lease. Common terms for operating leases are FMV, Tax, or True Lease.
2. Capital Lease
With this type of lease the company gets the benefits (and drawbacks) of ownership. Capital leases are usually used in cases where the company will likely buy the equipment at lease end. Common terms for capital leases are Full payout, $1.00 purchase option, and lease-to-own.
FMV (Fair Market Value), Tax or True Lease
As operating leases, FMV leases are most appropriate for cases in which a company is not 100% sure they want to keep the equipment. At the end of the lease, the business can either 1) Buy the equipment at fair market value; 2) Give the equipment back, or 3) re-lease the equipment.
Benefits of an FMV Lease
● Level monthly payments
● Option to purchase for a fair market price
● Ability to claim payments as expense (subject to the advice of tax advisor)
● Allows payment for equipment over time
● Conserves working capital
● Forklift can be replaced with a new unit at the end of the lease term
Full payout, $1.00 Buyout, Lease-to-Own
These are capital leases. They are great when a company wants the tax advantages of leasing and wants 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 buys it.
A full payout lease is like a $1 buyout, although the payments on a $1 buyout lease will usually be higher. Rather than paying just $1 at the end of the lease term, with a full payout lease the company can buy the equipment for a predetermined cost (usually set as a percentage of the original price.) This option provides a lower monthly payment like an FMV lease, but you retain the option to renew the equipment lease or return the equipment at the end of the lease agreement.
Benefits of a Full Payout Lease
● Level monthly payments
● Depreciation and interest deductions can be claimed by company (subject to the advice of tax advisor)
● Payment for forklift is spread out over time
● Business takes full advantage of tax benefits
● Conserves working capital
Is the lease right for you?
Every lease decision is unique, so it’s important to study the lease agreement carefully. Compare the costs of leasing to the current interest rate, examining the terms to see if they’re favorable.
Consider all these factors to see which option makes the most sense.
● What is the lease costing you?
● How does that compare 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?
Your partner for equipment, parts and more
When you’re considering a forklift purchase, lease or rental, reach out to us for help choosing the truck that matches your application and presents the best investment option for your business. We offer several lease options and can advise you on what best fits your business.
We also offer a broad range of replacement parts as well as exceptional service to make sure your equipment performs as expected over the life of the truck. Our trained representatives will partner with you to ensure you get the best for your specific needs.