When you first began your business or during your business’ growth stages, you may have asked yourself “Should I buy or lease equipment?” Yet the answer wasn’t as easy as saying yes or no on the spot. Depending on where your business is financially and where you want your business to go determines the answer.
Leasing equipment can be a great option for small business owners who don’t have access to unlimited capital or who need equipment that can be easily upgraded on a regular basis whereas purchasing equipment might be better for established businesses that need equipment with a long life. Every business is different and the decision to buy or lease equipment is one that should be made with care. Here are some pros and cons to both options to help you determine the decision that’s best for your business.
In an immediate period, leasing equipment preserves capital and allows your business to be a little more flexible. However, it may cost a bit more in the longer run.
Less initial expense
The main advantage of leasing equipment is that it allows you to get what you need while spending the least amount of money upfront. Leases rarely need a down payment, so you can obtain the equipment your business needs without seriously damaging your
Leases and lease payments can normally be deducted as business expenses on tax returns, so it can help reduce the net cost of your lease.
Leases are normally easy to obtain (much more so than buying equipment) and have more flexible terms than the terms of a loan when you buy equipment. This can be a huge help if your credit isn’t the best or if you need a longer payment plan to help lower costs.
Upgrades are easier
Leasing is great if you need items that are constantly updated and upgraded, especially in technology. You can lease equipment for as long as you need, and then you are free to lease or buy more efficient and cutting edge equipment after one lease expires.
Higher overall cost
Leasing a piece of equipment tends to be a little more expensive than buying it in the long run. The reason behind it costing more is that you might not use the product for its full life span and the distributor needs to make a profit and reuse or sell it elsewhere
Obligation to pay entire term
You are required to pay for the entire lease period whether you use the equipment. Sometimes leases may give you an option to cancel the lease if your business has trouble, changes direction, or deems the equipment unnecessary. However, large early termination fees usually apply.
When you buy equipment for your business, you’re probably wanting something for the long term. And you probably did a lot of research to make sure the type of equipment is what you want for at least the next 10 years. While the idea of pure ownership is appealing, the high costs upfront might not be great for every small business owner.
The best advantage of buying equipment is that you gain ownership of it. It’s really helpful when the property has a long life and isn’t likely to become outdated anytime soon. An example of this type of equipment is machinery for a farm.
In the Internal Revenue Code, it states that you are allowed to fully deduct the cost of some newly purchased assets in the first year. This can be really helpful in lowering the initial costs of your equipment. You can also receive some tax savings through depreciation deductions.
High initial expense
In some cases, purchasing equipment may not be the best option purely because the cash you must put out at the beginning may be too high. Even if you plan to borrow money and make monthly payments, usually these lenders (such as banks) require a down payment of about 20 percent.
When deciding if you should buy or lease a specific piece of business equipment, you need to figure out the approximate cost and net cost of that equipment. Factor in tax deductions, tax breaks, resale value, and all other sorts of financial information that can help make the item more or less expensive. Don’t forget to also factor in information such as the product expiration date or lifespan before your lease or buying period is over.