If you intend to start a construction company, you will understand the significance of a crane, which aids in the general lifting of heavy weights. Because cranes are expensive pieces of equipment, paying for them out of pocket is difficult, which is why crane finance is the best option.
Although crane financing may appear to be straightforward on the surface, exploring them across the seeming niche area of financing can become a bit like diving down the rabbit hole. We hope that by the end of this post, you have a better understanding of whether you should go with a crane equipment lease or a crane finance installment loan.
An introduction to crane financing
Crane financing makes use of a loan or lease to purchase or borrow hard assets for your business. It makes use of financing options to purchase or borrow various types of physical assets for your business. Various crane financing options cater to the various types of businesses as well as the crane.
The most important factor to consider when it comes to crane financing is the financing for the physical asset. So, why is it so important? It is extremely unlikely that you will mention that the working capital loan and the asset you are purchasing all serve as collateral. As a result of the lender repossessing the asset, crane financing appears to be highly cost-effective by lowering the risk in the way the crane is acquired with other types of financing.
What are the strategies used for crane financing?
When you choose crane financing, you will need to have an idea of what you are purchasing before contacting your crane financer. You should also have an idea of whom you intend to buy it from.
In several cases, the crane financer covers nearly every percentage of the crane’s cost. In reality, several crane financiers are directly paying the crane vendors, with no money passing through your bank account.
The technical standards of your financing will vary depending on whether you are taking out a loan or a lease; however, most crane financing terms range from two to seven years. Generally, you make monthly payments to your crane financer during this time to pay off the principal and interest. If you are in default on your loan or lease, your crane financer will usually begin repossessing the crane and reselling it.
Crane lending vs. leasing
One of the most common methods of financing a crane is through a loan or a lease. Although there are several differences between these two methodologies, both achieve similar goals by providing you with complete access to the crane required for business operations.
Let’s take a closer look at them both:
The loan was derived from the explanations for purchasing a crane. In general, the crane secures the loan, and if you are unable to repay it, the crane is collected as collateral.
These loans are extremely beneficial to entrepreneurs who need the crane for the long term but cannot afford to buy it outright. The lending institution may agree to extend the majority of the capital, providing you with opportunities to pay periodic raises.
The arrangement has a couple of drawbacks, including the fact that several lending institutions agree to pay only 80 or 90% of the cost, leaving you to cover the remaining 10 to 20%.
The other disadvantage here is the long-term arrangement, which results in a higher cost involvement than purchasing the crane outright.
If you intend to trade out frequently or do not have the capital to pay the down payment required for this loan, crane leasing is the best option, and it is more likely to cover the additional soft costs associated with shipping and crane installation.
Instead of borrowing money to buy the crane, you are simply paying a fee to borrow it. Although the crane leasing company technically owns the crane, you are permitted to use it.
The crane arrangements vary depending on the needs of the company. Typically, merchants enter into this lease agreement if they are required to replace their cranes regularly with an updated version.
If you want to own the crane, a few lessors offer a purchase option at the end of the lease term.
When compared to a loan, leasing typically has lower monthly payments; however, it may be more expensive in the long run. Leases appear to be more expensive in some ways because they have higher interest rates than any loan.
The two main types of lease options are finance and operating. The former begins to function more like an alternative to the loan while it is used for long-term financing of the crane you wish to obtain. The latter is much closer to rental agreements, and in some cases, you may be required to return the crane to the lessor once the term expires.
Both types have numerous variations, and you will frequently encounter the following:
Fair Market Value (FMV) Lease:
With the help of an FMV lease, you could begin making those regular payments as you borrow the crane for a set period. You will have several options for returning your crane or purchasing it at fair market value whenever increased.
Lease for One Dollar
It is a capital lease in which you pay off the crane’s entire cost plus interest over the lease term. Finally, you have one dollar. After paying such a residual, you have complete ownership of the crane, which is more than just a formality. Apart from the technical differences, it is similar to a loan in terms of cost and structure.
10% Lease Option
The lease is identical to a $1 lease; at the end of the term, you can buy the crane for about 10% of its original cost. When compared to the $1 buyout lease, it has lower monthly payments.
Considerations when choosing between a loan and a lease
Is a loan or a lease better for your specific situation? Here are a few questions to help you decide on this option.
Is a 20% down payment within my reach?
If you are unable to pay 20% of the crane’s value, you may have fewer options for obtaining a crane loan. Having said that, a couple of non-traditional lenders offer crane loans that cover approximately 100% of the costs. However, you may have a better chance of finding a lease that covers all expenses, especially if you require assistance with transportation and installation costs.
How much can I afford to pay each month?
Fair market value leases have lower monthly payments than loans. While your profit margins are thin, the lease is worth considering. Always be aware if you intend to buy the crane at the end of the lease term, as you are more likely to pay everything at once for the crane. In the long run, this arrangement is a little pricey.
How long will the crane be needed for my business?
Generally, if you need the crane for more than three years, financing is preferable. Although both leases and loans provide better opportunities to own the crane, loans become more affordable as time passes.
When a crane will be dysfunctional?
If you use a crane that quickly wears out and becomes obsolete, leasing is the less expensive option, and you won’t have to decide what to do with this obsolete crane.
Alternatively, when looking for a lease, you want to make sure that your crane does not become obsolete before the lease term expires. You are responsible for paying until the term ends, even if you are unable to use the crane.
How do you constitute the crane?
Your financial agreement has an impact on how the crane is accounted for on the balance sheet. It primarily applies to operating leases and is dependent on the arrangement where the crane may be considered an asset for operating expenses.
Looking for the Best Crane Crane Financer:
With the rapid advancements in the world of the Internet, finding the right crane financier for your business has never been easier.
There is also a good chance that your bank will do some crane financing, which is usually the case for banks with the best rates and the most stringent qualifications.
Things may become more difficult with the availability of several online lenders. Several institutions do not provide crane finance options, which do not apply to crane finance installment loans or leases to own the equipment.
Alternatively, a couple of online lenders specialize in crane financing. In any case, make sure you understand the type of lease or loan you’re signing. Several third-party crane financiers are selling used cranes that their previous lessees have returned to them.
The final option is to work with a captive lessor, as these vendors provide in-house financing for the crane you purchase.
In general, crane leasing is the best option for those who need to be upgraded regularly, while financing is the best option for your crane to last a long time and remain useful.
Remember that you are not limited to traditional lease terms, with invoice factoring and lines of credit being the most common financing options if you cannot pay for the crane out of pocket.
Whatever path you choose for financing your crane, do the math and go over the contract to ensure the term works for your company!