When it comes to running a business, you need to be savvy with your money to succeed. And, part of being financially smart includes making decisions about leasing or buying equipment. But, which is a better choice for your business? Get the rundown on leasing vs. buying equipment, including what to consider when it comes to purchasing or leasing assets for your business.
Leasing vs. buying equipment in business
In your personal life, you’ve maybe considered leasing vs. buying a car. Leasing vs. buying equipment for business works similarly. You may decide to lease or purchase equipment, such as machinery and technology (e.g., computers), depending on your company’s financial situation.
When it comes to buying vs. leasing for business, the main difference revolves around ownership in the asset. Dive into the differences of each below.
When you lease equipment, you do not have ownership of the asset. Instead, you rent equipment without owning it and pay a monthly fee (typically with interest) to use it. With leasing, you may also need to make a down payment, too (think leasing a car). And, you have to sign a contract that includes information about your monthly fee and when you need to return the leased equipment.
With leasing, you have access to the equipment for the life of the lease. For example, if your lease is for five years, you have access to and can use the equipment for five years until your lease contract expires.
In some cases, you may be able to purchase the equipment at the end of the lease depending on what is in your contract.
Leasing can be a good option if you want to conserve cash flow. Not to mention, it can be a good option if you need equipment quickly and don’t want to pay for expensive equipment.
On the other hand, when you buy equipment, you own it. Although it can be appealing to own the business equipment yourself, it can be expensive to purchase it outright.
Depending on what you’re purchasing and how you pay for it (e.g., loan), you may need to pay a certain amount of cash up front. Plus, you might have loan terms that require monthly payments and/or accrue interest.
If you purchase your equipment with cash (in full), you own the assets right away. But, this also means you’ll have less available cash on hand to cover other costs.
Pros and cons of leasing vs. buying equipment for business
Before you make any decisions about equipment, sift through the pros and cons of each to ensure you’re making the best choice financially.
Benefits of leasing vs. buying equipment
So, what’re the benefits of leasing vs. buying equipment? Get the scoop below.
- Own the equipment
- Lifetime cost is usually cheaper (you can calculate this with life cycle costing)
- Counts as an asset on your balance sheet
- Can claim depreciation on your taxes
- Free to use equipment however you choose
- Can sell the equipment after using it
- Some payments for purchased equipment can be tax deductible
- Down payments are usually cheaper (and sometimes no down payment is required)
- Terms are more flexible (e.g., can buy out lease)
- Can test out equipment before committing to it
- Maintenance costs are usually free
- Payments for lease payments are generally tax deductible
- More accessible if you don’t have good credit
- It can be easier to upgrade after your lease expires
- Easier to acquire more quickly
Disadvantages of leasing vs. buying business equipment
Of course, there’s no such thing as a perfect system. Buying and leasing both have a few disadvantages. Get to know the cons before deciding which route to take when it comes to equipment.
- Need more cash or credit upfront
- Cannot always test out the equipment before purchasing
- You are liable for maintenance and replacements
- May get stuck with old and outdated equipment
- Increase liabilities on the balance sheet, which could prevent you from borrowing more money
- You don’t own the item while leasing it
- Higher overall lifetime cost
- Depreciation isn’t tax deductible
- Obligation to stick with the lease due to contractual obligations
- Termination fees for breaking the lease contract
- Operating leases may appear as a liability on your balance sheet
Leasing equipment vs. buying: 4 Considerations
There are a lot of factors you need to consider before making the leap to purchase or lease equipment for your company. After you weigh the pros and cons of buying vs. leasing business equipment, also ask yourself the following questions.
1. What is the equipment for?
What’re you planning on using the equipment for? Are you wanting to use it long-term or short-term? The answers to these questions can play a role in which way you go when it comes to business equipment.
Certain machinery wears down over time the more you use it. And some equipment, like computers, may become obsolete more quickly than others.
Think about the equipment you are wanting to purchase or lease. How long will it last? Will you need to replace it in a few years? If you think the equipment will be functional and last for many years, consider making the move to purchase it. On the other hand, if you think the equipment will quickly become out-dated, maybe consider leasing it instead.
2. How much capital do you have?
The amount of capital your business has can sway your decision on buying vs. leasing.
If you have excess capital and a strong cash flow, buying may be the best option for your business. That way, you don’t have to stress over financing or lease agreements.
On the flip side, if you don’t have a ton of extra capital on hand, it’s typically best to lease the equipment (at least for the time being). Leasing allows you to keep what capital you have in case you need it for other reasons (e.g., emergency repairs).
3. Do you want growth or profitability?
When it comes to choosing between leasing and buying, you need to determine if you’d rather focus on business growth or profit.
If your goal is to grow, you should retain as much capital as possible and go the leasing route. You can use your cash to purchase other assets that can help you grow your business. Plus, you can focus on conserving your cash flow.
If you’re striving to earn profits fast, investing in equipment may be the better way to go. Owning equipment can help lower your business operating costs and allow you to build up the overall value of your company.
4. Are you willing to handle equipment maintenance?
When it comes to leasing equipment, you generally don’t have to worry about handling repairs and maintenance yourself. Instead, they’re usually covered by the company that is leasing the equipment to you.
But when you purchase equipment, you’re the one who is responsible for all of the maintenance—and all of the costs associated with said repairs.
So before you commit to buying any equipment, ask yourself if you’d be willing to handle the equipment’s maintenance costs. And, do your research to find out what potential maintenance might cost you.
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This is not intended as legal advice; for more information, please click here.