Rental Purchase Options Can Reduce Risk

September 18, 2017

Purchasing heavy equipment is a major investment and can come with significant financial risk. The decision to purchase either new or used equipment should be carefully considered based on long-term utilization projections for your business.

One way to mitigate the risk of outright purchasing equipment for a project is to sign a Rental Purchase Option (RPO) at the start of a rental agreement. An RPO - or a rent to own agreement - allows you to build equity while renting. “About 20-30% of rental equipment is purchased under RPO agreements each year,” says Joey Lucas, Rental Manager for Papé Rents.

How does rent to own work?

An agreement is signed at the time of rental that specifies a time period in which a  percentage of the rental fees will be allocated toward the purchase of the machine. If the renter decides to purchase the equipment during this period, the agreed upon percentage of rental fees will be applied to the sale to reduce the purchase price.  It’s important to note that an RPO is strictly an option. The renter is not obligated to purchase the equipment at the end of the rental period. 

What are the advantages of an RPO?

Aside from the ability to build equity while using the equipment risk-free, there are other advantages to consider:

• Equipment condition - Rental equipment is often in better shape than other used equipment because rentals are inspected after each use, preventive maintenance is completed on schedule, and only factory OEM parts are used for repairs.
• Limited financing – RPOs can help make up the difference when limited credit is available. Say for example, a business is approved for a $30,000 loan, but the piece of equipment they’d like to purchase is $38,000. Building equity during the rental period can help bring down the purchase price to the loan amount they’ve qualified for.

What are the disadvantages of an RPO?

There really aren’t any disadvantages of signing a typical rent to own agreement if you think you’ll ultimately want to purchase the equipment, but these are a few things to note when reviewing the contract:

• Maintenance requirements – Most rent to own agreements specify that all scheduled preventative maintenance is the renter’s responsibility during the option period. Depending on the length of the option period, this is generally a non-issue, but it is something you should clarify before signing an RPO.
• Penalty clause – Occasionally, RPO agreements will have a penalty charge based on hours of use if you decide not to exercise the option to purchase. Make sure to clarify the terms of the agreement with the rental manager before signing.

If your short-term equipment need has the potential to become a long-term need, signing an RPO at the start of a rental agreement can eliminate the risk of adding long-term debt to the balance sheet before your business can carry it. “RPOs can be a smart decision across all industries, but especially in construction where subcontractors can often pass the rental fee through to the general contractor,” says Lucas, “It’s a great way to build equity.” By building equity while you rent, you’re ahead of the game if you decide to purchase during the option period, and if you decide you don’t need the equipment long-term, you won’t be stuck trying to sell it.