Happy Tuesday Folks!

Welcome back to another edition of The Contractor Finance Playbook.

I came across this question the other day on social media from a contractor asking about when purchasing new equipment, is it worth financing new equipment purchases or is it too risky and should pay 100% cash. This is especially relevant because every contractor will deals with this at some point in their business journey.

Let’s dive on in!

I’m constantly keeping an eye out for good questions floating around social media, and this one caught my eye. Names and accounts has been redacted to protect confidentiality.

Do you think it’s worth financing the equipment to get started if there’s clear demand in your area or is it too high risk and wait to pay in full?

I want to clarify before I answer here that every contractors situation is different and my anwser is not one size fits all. When considering new equipment, this needs to be evaluated on a case by case basis.

My answer to this is: Yes, you should finance the equipment, but only if it makes sense for your business.

Every business is different and has different overhead. Just because a contractor was able to swing a new skid steer doesn’t necessarily mean you can.

Now, if you can buy a piece of equipment with cash without depleting your cash reserves, that’s great! However, that’s not always possible especially for contractors that are just starting out.

Finance it. But only under two conditions.

Before you take on a loan and payment for equipment, you need to know the work exisits to service it. A skid steer just sitting in the yard isn’t making you money. If you’ve got jobs already lined up, repeat customers calling or a backlog of work lined up that you haven’t gotten to yet, that’s demand. If you’re hoping the work shows up after you buy the machine, you’re potentially putting yourself and your business behind the eight ball.

One note if you’re either just starting out as a side hustle, full time or just starting a new service - pre-sell work before you actually start. This proves out that there is at least some demand for the service that you are offering and will bring in immediate cash flow when you start the fufillment of the work.

Run the math on the monthly payment against the revenue that the equipment will actually generate.

Not every loan is a good loan and you don’t want to take on unfavorable loans. If the terms are unfavorable, high interest or balloon payments - walk away. Don’t take on a bad loan just because you’re eager to grow. Financing is a tool that can be very beneficial when used correctly but can also hurt when its used incorrectly.

Generally speaking interest rates for equipment loans are pretty low compared to other PPE. Most of your large dealers like CAT, Deere, Kubota, etc. make the process super easy. But before you take on an equipment loan, just make sure the numbers pencil out so the purchase makes sense.

If your just starting out or rolling out a new service that requires a piece of equipment - renting is your test drive. Sure, it costs more per hour to operate but don’t cost anything when you don’t have any work lined up.

Rent while your providing out demand for your work. Once the work is steady or a backlog is built, then it starts to make sense purchase your own machine, either financed or cash, which ever makes more sense.

That’s all this week folks!

P.S. Have a question you want answered here? Send it to me at [email protected]. You might see it in a future issue.

Til next time, cheers!

Preston