Should I Lease or Purchase Equipment for My Business?
Are you in need of some new equipment for your business but don’t know what the most cost effective option is? Have you thought about the differences between leasing and purchasing? With many different pros and cons, it can be hard to chose. Below are some things to consider before you make a decision.
With every business, whether brand new or existing, there are costs that will be incurred no matter what. Some of these hard costs include rent, utilities, insurance and equipment. Equipment, on the other hand, can vary based on your specific needs, but having access to the right equipment at the right price is crucial for your business’ ultimate success.
If you are a start up and you want to conserve your cash (which is wise) or don’t have cash readily available, then leasing could be the right option to choose. Before you decide whether to lease or purchase, it is important to familiarize yourself with lease terms and the pros and cons of leasing.
There are two primary types of leases, true leases and financial leases.
True leases give you property for use over a short to moderate period of time. You receive no rights to the property and you aren’t responsible for maintaining the equipment. These leases generally last for a fixed, pre-determined period.
Financial leases are more like a lease to purchase option. The financing is long term and you usually have an expected need for the equipment for the life of the equipment. You cannot get out of the lease and you are responsible for the property and its maintenance. If you rarely require a jackhammer for you business, you should probably find a true lease each time you need one but if you need a dump truck to complete daily tasks, you’ll likely use a financial lease.
These are some of the pros of leasing equipment:
- There is little to no cash outlay. This can be great if you don’t have funds immediately available or don’t want to waste all of your cash when you need it for other important things. Save your cash for inventory, enhancements, or marketing which will increase your business and overall profits.
- It is easier to lease than purchase equipment due to credit restrictions and stipulations. Sometimes your credit may be lacking when you are focused on running and maintain your business. Leasing gives you the ability to get the items you need without applying for credit financing terms when you purchase large amounts of equipment.
- There is flexibility in terms of the monthly payment amount, terms and lease length. You have more negotiating power in the deal and are able to break up the entire cost over the life of the lease.
- It is a great way to try an item to determine if you want to buy it later. You are able to test and compare brands and models to determine which option is the best for you. Not sure whether to pick between the LX model or the DLX model to suit your needs? Leasing provides you a low cost trial period before you shell out thousands of dollars to purchase and find yourself with buyer’s remorse.
- Leasing can be particularly advantageous if your company needs items that have a technological shelf life like communications or computer equipment. You have the ability to do a shorter lease and d stay current with the constant changes in technology.
An example scenario of where leasing can be beneficial to you would be if you owned a restaurant and leased a refrigerator. Spending thousands of dollars on a commercial refrigerator isn’t going to give you a competitive advantage, but using that saved cash to add an additional patio seating area will give you a great return on investment.
Alternatively, you might find yourself wanting to purchase items for your business. Below are some of the cons of leasing equipment.
- Cost over the life of the item is one of the main reasons people buy rather than lease. Because you are technically renting the item, you are paying interest. There is a charge added within each monthly payment. Over the life of the lease you could end up paying hundreds or thousands of dollars more for an item than the cost of purchasing it outright.
- When you buy an item you may qualify for purchase financing. This can be a better option that leasing because the overall long term costs will be less expensive. This does usually require a down payment, but as long as you have a use for the item during its entire life, it could save you money without tying up a majority of your available cash.
- If you purchase the item you will have paid for it in full and don’t have to worry about it as a monthly payment that will increase your operating costs and overhead. Less monthly payments equals higher income and profits.
- Another con of leasing is that you have no equity in the asset. When you buy something you are able to write it in your books as an asset. You can also write off depreciation. With leasing, you pay to use the item but don’t hold any stake in it, unless you are doing a lease to purchase option. It then becomes a liability because it is a monthly payment rather than something you own and can write off as a deductible on your taxes.
- Depending on the lease contract you sign, you could be stuck with an item that you hate or no longer have a use for. In this case you are still paying for something that is just taking up space. If you purchased the item outright you can still sell it and get something to replace it.
In the scenario of needing and buying a tractor for your excavating business, purchasing using purchase financing is a much better option than a lease. This item has a long useful life because the technology doesn’t change that much and over the course of 20-something years it will save you thousands over leasing.
If you find yourself still torn over whether to purchase or lease you can use a lease vs. purchase calculator. Many websites offer these and you can find one with a simple Internet search. They provide a formula where you input the sales price, down payment, tax rate, terms and market value. Additionally, there are input fields for terms of the lease and the cost to purchase, and whether any additional fees or financing will be incurred. After all of the data is analyzed it will give you a comparison of which option is better. This numbers comparison will help solidify your decision.
With any major purchase, make sure you do your research on both the item and the company from which you are leasing. It is in your best interest to closely review terms, have your accountant and lawyer look over the paperwork and see what the best deal is to suit your needs. There are tax advantages and disadvantages with both leasing and purchasing, but one option may be more advantageous to your current needs. Usually its better to buy inexpensive items and lease expensive ones. Remember to only purchase or lease items you need, not just want, as cash in hand is better than any cash tied up.