One of the things you may not have considered as a business owner are your equipment needs. Will you buy it outright? Or lease it? It’s a question you’ll face and an answer that’s not easy (did you expect anything less?).
Here’s the short answer: It depends on your situation.
Here’s the slightly longer one: Each business is unique and the decision to buy or lease business equipment must be made on a case-by-case basis. There are pros and cons to each one. Read on for more details.
To lease or not to lease?
Leasing can be a good option for business owners who have limited capital or need equipment that must be updated every few years. Leasing preserves capital and provides flexibility. However, it may cost you more in the long run.
- Less initial expense. This is the primary advantage as it allows you to acquire assets with minimal initial expense.
- Down payment is either very low or non-existent.
- Payments may be a deducted as a business expense. Just make sure you check with your tax accountant on the appropriate lease to obtain.
- Flexible terms as leases are usually easier to obtain and have more flexible terms than loans. This can be significant if you have bad credit or need to negotiate a longer payment plan to lower your costs.
- Easier to upgrade equipment as leases allow you to address the problem of equipment no longer being used or useful. You are free to lease new, high-end equipment after your lease expires.
- Higher overall cost. Leasing an item is almost more expensive than purchasing it. For example, a three-year lease on a computer worth $4,000 will cost you a total of $5,760 vs. buying out right at $4,247 (taking into consideration the time value of money), a savings of $1,513 by purchasing vs. leasing.
- You don’t own it, so you don’t build any equity. Lack of ownership can be a significant disadvantage.
- Obligation to pay for the entire lease term even if you stop using the equipment. Some leases give you the option to cancel the lease if your business changes direction and the equipment you leased is no longer necessary. However, you could incur an early termination fee.
To buy or not to buy?
Purchasing equipment can be a better option for established businesses or for equipment that has a long usable life. Ownership and tax breaks make buying business equipment appealing. However, the initial costs mean this option isn’t for everyone.
- Ownership is the biggest advantage of buying equipment. This is especially true when the property has a long and useful life and is not likely to become technologically outdated in the near future, such as office furniture or farm machinery.
- Tax Incentives. Check with you tax accountant to get the latest tax incentives that the IRS will allow.
- Higher initial expense. If you pay cash, it takes away working capital. If you take out a loan, most banks will require a minimum down payment of 20% and lenders may place restrictions on your future financial operations to ensure that you are able to repay your loan.
- Getting stuck with old equipment. If you buy equipment that is high-tech you run the risk the equipment may become technologically obsolete and will have very little resale value.
So you still haven’t answered the question.
It’s your call to make, not ours. When deciding whether to buy or lease business equipment, figure out the approximate net cost of the asset. Figure in tax breaks and the resale value when making this calculation.
After determining which option is more cost-effective, consider other intangibles such as the possibility the product will become obsolete or that your need for the product will expire before the lease does. Each decision regarding buying or leasing needs to be made carefully to best fit your company’s situation and needs.