“To rent or not to rent, that is the question!” — William Shakespeare
Of course, Shakespeare didn’t say this, but if he were a farm equipment dealer he would be probably be asking the question because farm equipment dealers are definitely probing the possibilities of rentals these days. With that in mind, this Planning for Profits column provides some key answers to questions about rental programs.
Why a Rental Program?
More dealers are introducing rental programs because farmers and rural lifestylers need or want to rent. Here are some reasons why
Some need equipment and don’t have it — yet. Renting helps get their work done and shows how the machine will work in their application. This is often the case with innovations, specialized machines or new, untested brands.
Some have equipment that is being repaired, but they need to get their work done now and can’t wait for the repairs to be completed
Many more forward-thinking farmers are changing their philosophy for making money, and want to just pay for the use of equipment so they can use their capital for other investments.
As a dealer, you want to take care of all your customers’ needs for new and used machinery, as well as parts and service. To be the single source for customers and to capture all of their equipment spending, you need to be in rental because you improve your competitiveness vs. other dealers.
There are other reasons to rent, but these are enough to move on to the next question. Renting equipment means that the customer is shifting the investment and the risk of owning equipment from themselves to you. Are you ready for that increased risk as well as the opportunity for increased rewards?
Rewards of Renting
Rental requires investing, so the best measure of success is return on investment. In other industries where we advise dealers — construction equipment, forklifts and power generators — we expect 15% of the revenue in profits before tax (after administrative costs) each year. With a rental fleet of $1 million, these dealers expect revenue levels of 60% a year, or $600,000.
The challenge for ag equipment dealers is whether or not they can achieve revenue levels like this from farm machinery rentals.
Let’s run some numbers and consider a $178,000 tractor that can bring in $106,800 annually in rental revenue, or $8,900 a month. About 30% of that number will be depreciation expense, plus interest and maintenance.
You’ll need someone to manage and maintain the rental fleet. You’ll also need to pay taxes and benefits, and carry insurance, even though the customer will also need to have insurance (more about this later).
Of course, it will also involve advertising and computer costs, as well as other operating expenses. So, if you were able to get $8,900 a month in rental, you would keep $1,335 each month, or $16,030 a year.
If you sold the same tractor at retail for $178,000, you might keep 2-4%, or $3,500-$7,000. It goes without saying that you certainly would make more money by renting. But the risk is significantly different, too.
Risks of Renting
Compared to a straight sale, your liability risks with rentals can be more substantial. In a sale, the customer buys the equipment, pays interest and takes title to the machine. If they’re in an accident, you might be named in a lawsuit along with the manufacturer.
Because you own the rental, you’re more vulnerable to a lawsuit. But the ROI and revenue can be considerably higher than a sale. The balance between risk and reward of a serious rental business can be excellent.
There’s also risk in keeping the equipment rented 100% of the time, or at least for a high percentage of the time. Renting in other industries, like construction, forklifts and power generators, is more popular because the equipment presents the opportunity for high utilization rates. But farmers and contractors in the agriculture segment face lower use rates, whether they own or rent.
Custom combining, gins, custom planting and other seasonal farming activities often involve working 24 hours a day in season and zero hours out of season. Most farming operations have invested in equipment that is used very hard for short periods and then not at all for long periods. With rentals, farm equipment dealers must consider seasonal timing, yet understand that the opportunity to rent to more than one person during a season is also available.
There are also risks depending on how you rent. For example, you don’t necessarily have to invest in a “rental fleet.” You can rent used or new equipment you already have in your yard — but there are concerns with this as well.
If you rent new equipment, some floorplan programs consider this the beginning of a sales transaction and require you to pay the financing firm. If the financing firm audits their equipment, you may be told that you “sold out of trust” or SOT, and may expect you to pay the total price of the equipment immediately. This is a serious issue and could damage your credit for future transactions. Be careful and check your floorplan agreement!
We urge you to start by renting used equipment because you’ll be able to generate a return on a slow-moving asset and, in most cases, avoid the SOT situation. But again, read your loan agreements to determine whether the used equipment is collateral for other loans.
Other Rental Factors
Rental is a very different business for most farm equipment dealers. Here are some important issues to consider for a successful rental program.
There are many questions to be asked, but these are most important.
What rental price should be charged? In other industries, the benchmark for rental rates is measured in monthly revenue as a ratio of the acquisition of the asset, or rental units. Our normal benchmark is 5% of the acquisition price in revenue each month. That 5% revenue per month already factors in utilization, so at that level you need 5% all 12 months of the year. If you expect seasonality, which you will with farming tasks, then you might need to charge 7-10% of the book value of the equipment.
You can convert this monthly charge into hourly or daily or weekly rates, but the end result is to get 5% of the original acquisition value in monthly revenue dollars. Because rentals can and should generate a good margin, don’t get fooled by what the neighboring dealer is charging or what the customer tells you they can get it for. You need to charge a high enough rate to make money at rental or it’s a waste of your efforts.
Who should do the maintenance? Your company needs to do the maintenance — period. Yes, the equipment is with the customer and it’s out in the field, and the customer may have the capability to do the work. But you can’t put a machine back into your rental fleet believing all the service, oil changes and maintenance has been done.
The machines you rent are your assets. You need to maintain and repair them. Renters don’t own the machines — you do.
What insurance coverage is necessary for the dealership? What coverage does the customer need? When you talk to your insurance agent, broker or carrier, their first reaction may be to tell you not to rent. They want to minimize their risk in having to pay claims. This might also be a real stretch of your dealership’s risk compared to what your policy was expected to cover.
Make sure your insurance policy gives you adequate coverage. Then find out what insurance information you need from the customer to protect you from as much risk as possible.
Many dealers new to rental don’t think about verifying the customer’s insurance when they rent. In the commercial rental business, it is general practice to get an insurance certificate from the customer indicating their insurance company, their policy number and contact information for any claims. Keep this customer insurance information with the rental contract.
What procedures are important and are there implications for selling the rental machine and creating a potential customer? Successfully operating a rental division in your dealership starts with a rental contract. If you don’t have a standard rental agreement form, contact other dealers in your network and find out what they use. With the growing popularity of rental, there are many good examples of practical, well-written contracts. For example, find out if the contract is printed on the backside of the rental agreement or if it’s a separate document.
When renting a used unit to a customer whose own equipment is in your shop, consider the change in condition and value of that equipment during the rental period. A reduction in used value can’t be ignored because you received rental income for its use.
Rental, especially for used, creates sales opportunities. You can often talk to the customer about applying some of the rental charges against the purchase price of the unit after they have used it for a while.
Beyond renting new equipment on floorplan or used equipment, you need to decide whether and how to invest in a separate rental fleet. This is a major decision and the correct procedures for stocking and replenishing a separate rental fleet are important for risk, reward and return from renting.
To Rent or Not
Shakespeare did say, “To be or not to be?” If you are going to be an equipment dealer, you need to ask and answer the questions, “Should you rent or not?”
If the answers to the following questions are “Yes,” then you’re a good candidate to offer a rental program.
* Are customers asking to rent?
* Can you charge a price that is good business based on benchmarks and be competitive at the same time?
* Can you manage rental as a department with gross profit, expense control and good fleet asset management?
Operating a successful rental division in your dealership is possible — the proper practices can be learned, trained or hired, but first you need to decide that rental is right for you.
The authors are with Currie Management Consultants who specialize in advising dealers in the machinery industry. They can be reached at GRussell@CurrieManagement.com and GKeen@CurrieManagement.com.