For many businesses, industrial equipment leasing is becoming a popular alternative to purchasing.

Due to a combination of factors, the industrial equipment rental industry is experiencing an unprecedented boom. According to a recent survey by the Equipment Leasing Association (ELA), the leasing of industrial equipment makes up more than 11% of the general equipment leasing industry. In the words of Ralph Petta, vice president of research at ELA, “Everybody leases. Eight out of 10 manufacturing companies lease some type of production equipment. The industrial manufacturing sector is a huge and growing leasing market.”

While multi-billion dollar equipment makers like Boeing, Caterpillar and Siemens AG continue to reap huge profits from the distribution of their products through leasing, a handful of strong, new players such as Hertz Equipment Rental Corp., United Rentals, Atlas Copco and GE Rentals have emerged in the last few years. Spurring this industry-wide growth has been a significant shift in the United States from companies owning equipment to renting it. According to Bob Miner, vice president of strategic planning at United Rentals, “Leasing was really a cottage industry until 1996 – 1997. There were no large companies in this business. Customers did not have anyone to go to with confidence that the equipment they wanted to rent would be available and first rate. It is only within the last three to four years that the large rental companies have emerged.”

Generating the current growth of the rental industry are a number of recent trends among U.S. companies. One of these is a move away from cash transactions. “Few companies really pay cash today, even when a company says it’s a cash buyer,” says Bob Lang, president of National Machine Tool Financial Corp, an Illinois-based company that obtains equipment and financing for industrial rental customers. Instead, these companies are using their credit lines to finance payment. Another benefit of leasing is that it requires much less of a down payment than buying equipment up front. This frees up funds to invest elsewhere. Lang elaborates, “…by leasing you get a lower payment than you do by buying it. You also have an option at the end to retain the equipment, purchase the equipment or send it back. Renting or leasing gives you flexibility, a lower payment and you retain your cash flow.”

With buying equipment there also comes the need to maintain it which can represent quite a bit of long term investment. With leasing this becomes the rental firm’s concern, effectively freeing up funds for alternate investment.

Another possible reason for the rental industry’s growth may have to do with a trend in U.S. companies towards versatility. In addition to a company’s core responsibilities, they are now performing additional functions that may only require part-time use of certain equipment. For these companies, buying the equipment just doesn’t make sense. “We couldn’t possibly buy every piece of equipment we need,” says John Jenkins, general manager at the Lockwood Sign Group, Inc., a Georgia-based sign manufacturer. “Usually there is not enough constant use to justify the cost.”

The fact that lease payments are tax deductible is another reason for growth in the rental arena. In the eyes of the IRS, an operating lease is not considered a purchase. So lease payments can be tallied up on the company’s income statement as overhead expenses and written off. In addition, an operating lease is not seen as a long-term debt or liability. A purchase is an asset, and the debt incurred for the purchase is recorded as a liability on the balance sheet. And, a firm with too many purchasing debts on its record has more trouble getting loans. Leasing equipment is a way for a company to use the equipment needed for a job while preserving its line of credit.

One more reason companies are leasing is that buying equipment traps the owner into whatever the technological level of the equipment is at the time it was made. In the era of rapid technological advances, a company might find themselves owners of outdated equipment whose value is depreciating. With leasing, technological upgrades can be written into the contract, as well as services like installation and maintenance.

As far as the Internet and the rise of e-commerce is concerned, experts believe these advances will only help the equipment rental industry, allowing the opportunity for growth simply by facilitating the process of gathering leasing information. As the ELA’s State of the Industry Report puts it, “In the near future, it is likely that competitors will enter the leasing industry by using an Internet platform and begin to capture market share electronically.”

Even if the economy slows, the ELA predicts the leasing industry will continue to thrive. A downturn or recession could actually improve the leasing industry’s market penetration due to fact that companies would be even more apt to choose leasing over buying. New economy, old economy, fast economy and slow, whatever the case may be, it seems that the equipment rental industry will only continue to thrive.

Source: Equipment Rentals: A Decade of Growth
Nancy Syverson
Impomag.com, Aug. 2000
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