FORKLIFTS – Lease Vs Buy: What is Best for Your Business?

The decision whether to purchase, lease or rent forklifts depends on the particulars of the application and company preferences.

Forklifts are expensive. In fact, next to employees, they could be your largest expense. Your job is to look for ways to measure those costs accurately and reduce them.  With financial tools becoming more and more sophisticated and material handling equipment (forklifts) becoming increasingly complex it might be time to rethink the way you “purchase” your machines.  Is there a way to reduce the costs of your material handling equipment through leasing?

In a perfect world, if a forklift were idle the cost of it would be zero; if working, the cost of a forklift would be like paying an employee, e.g., $10/hour. Tie the COST to the WORK. Pay for USE. Essentially, that is what leasing or renting should do. Or at least it should get you closer to that ideal.  

Renting a forklift

Renting and leasing are almost the same. Rentals are usually short term, a few weeks or months. One advantage to renting is that you can experiment with a machine.  If you are not sure of the dealer’s response time to breakdowns, rent something for a few months and see how they respond to mechanical issues.  That experience can help you assess their capabilities.  Not sure if this “different” machine will be more productive?  Rent it for a few months and measure it against your existing forklifts.  Want to try a new method of picking?  Set up a temporary model and rent the appropriate equipment.  Use rentals to test your hypotheses.  

Peak periods are another reason to rent. Perhaps from September to December, you build up your business for the Christmas rush. To match this volume increase over this short term you may need to increase your fleet of forklifts. Return the rentals in December and save the cost of those machines for the next three-quarters of the year. Renting equipment increases your flexibility.

Renting is usually more expensive.  The extra cost of a unit pays for the machines that sit idle but available (in the dealer’s warehouse waiting to be rented).  Another reason rentals cost more is because the cost of maintenance is included in the monthly rental fee.  

The biggest difference between leasing and renting is that, when renting, you probably lose the option to purchase the machine.  A rental machine usually must be returned to the dealer.        

Leasing a forklift

Monthly leasing payments can vary from place to place. On an average, you may have to pay around $600 per month to have a forklift that cost around $25k. Monthly lease payment can be around $1100 for a forklift that costs around $50k. (That does not usually include the cost of maintenance.)

Positives Of Leasing

  • Lower Initial Costs: You can acquire an expensive machine without paying 100% of the cost upfront.
  • Increased Productivity: New machines every 3-5 years will ensure that downtime is reduced and the forklifts should be working at peak efficiency.  As labor is your highest cost it is important to get the most out of your employees. (Cost of labor is $10+/hour vs $1+/hour for your forklift).  Good tools should make more efficient workers.   
  • Cost Closely Matches Use: By spreading the cost out over 3-5 years the work done with the forklift matches the monthly lease and maintenance costs to get that work done.  It should help with budgeting.
  • Testing As You Purchase: Leasing allows you to test the machine without committing to a purchase.  Use the forklift for 3-5 years and, if it works reliably, and isn’t too well used, there is a provision to purchase it at the end of lease term.  Or return it.
  • Always Have The Latest Technology Updated Equipment:  With leasing, you get the opportunity to replace the forklift with the latest technology, updating your equipment at regular intervals. This is a strategy to keep technologically competitive in the marketplace and increase the performance of your business.
  • Tax-Advantage: In most states in the U.S. leasing is a 100% tax deductible operational expense. (Check your own state or provincial tax rules.)
  • Maintenance Cost Can Be Part Of Monthly Lease Price: It is common for the leasing company or dealer to offer maintenance packages to add to the lease payment.  This added cost will depend on the environment (e.g. cold storage maintenance costs are higher). The benefit is that you can account for it by paying one price per month.

Negatives of Leasing

  • Higher Long-term Cost: If you decide to exercise your option to purchase at the end of a term you may ultimately pay more than financing the initial purchase price of the machine. You are paying a premium (like an insurance policy) for the option of sending it back with no obligation. The dealer is taking on that risk.
  • Penalty for Over Use – the lease usually includes a clause to cover the number of hours that you intend to put on the machine. Like a car lease, if you go over that, there is a penalty. (Sometimes, if you stay with the manufacturer that penalty can be negotiated or covered in the new lease.)   
  • You Don’t Have An Asset: When you purchase a forklift outright, you can use it to borrow against, resell it, etc. But in the case of leasing, you can’t sell because you are not the owner of the machine.
  • The Possibility Of Poor Maintenance Service By The Leasing Company: As the maintenance is often up to the dealer/manufacturer or the leasing company, it may prove to be difficult to get things fixed in a timely manner. Before leasing, it is important to do your due diligence – understand the supplier’s capabilities and reputation, investigate references, etc. It may require you to include a spare machine in the contract to cover unintended downtime.

 

Buying A Forklift

Depending on your requirements purchasing could make more sense than leasing/renting. If for example, you need a machine to work one hour a week, leasing might not make sense. Purchase a used machine. Likewise, purchasing might be the best option if: 

  • there is no intention of changing the use and a machine will last 20 years
  • you have the cash to purchase, or you need the asset on your books as capital equipment
  • your bank has this inexpensive line of credit for you to use
  • or your owner simply prefers to own all capital equipment.

 Each company has their own unique policies and ways of looking at this decision.

Final Decision: Rent, Lease or Buy

More and more companies, including the majority of the Fortune Five Hundred in North America, are leasing forklifts instead of purchasing. From a budgeting standpoint, it is important to match costs with revenues. From a productivity standpoint, turning over your fleet every five years means you have newer and, therefore, more reliable machines.   Bringing in rental equipment when the demand is temporary could make good economic sense.  Leasing gives you the opportunity to keep up with new technology.  In this rapidly changing world, sometimes there is a need to retract your business.  Leasing could accommodate that.  If there is a need to radically change the way you are doing things, leasing might accommodate that.  

Every company has different needs. However, if you are not leasing now, and you have a fleet of machines, I would encourage you to consider this option. Purchasing might still be your best option but to be sure work through the benefits of leasing.

At least that’s my two cents.

 

Dan Beer has consulted on material handling and warehouse equipment along with related safety programs for 30 + years, serving companies including  Amazon, Starbucks, and Best Buy, among others. Dan can be contacted at danwbeer@gmail.com.  

 

Comments

  1. I already have someone upset. A Fortune 500 company. They DO NOT LEASE. Only purchase (new and used) because their maintenance team feels they can strip parts off old machines to reduce maintenance costs. Interesting philosophy. That would require a scrap yard of old forklifts, and enough in-house technicians at each site to cover each other for holiday/sick time. Downtime would be higher (older machines, more frequent breakdowns). And less efficient machines (“older” is generally “slower”). The cost per part would have to include a significant amount of labor stripping an old truck. Refurbishing that part. And expecting a higher failure rate from it. That is only the questions I have for maintenance. My bigger concern is production. Approximately 10:1 dollars cost of production labor to forklifts. If it were up to me saving a few dollars on maintenance costs is the old adage “Penny wise, pound foolish.”

  2. Rick Leblanc says:

    Hi Dan, to me it seems to be a case of “make versus buy” or doing it yourself versus outsourcing. The situation is going to be different for every company. One important consideration will be the cost – is it cheaper to do it yourself or to use a third party? And of course, an enlightened assessment of cost will consider the loss of uptime, late deliveries, potential reputation damage, etc. To the extent that you have in-house expertise and can do it more inexpensively/ in a more timely manner yourself, then in-house maintenance probably makes sense. If you are more expensive than hiring a service provider, then what are you waiting for?

  3. Good facts With thanks!

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