Is it time to start replacing some of your business equipment? You’re probably wondering if you should lease or buy. If you run a small business, you may think buying is the best way to go because you may not need as much equipment as a larger company. The truth is that the size of your company, and the amount of equipment you need may not matter.
Below is a comparison of leasing vs buying to help you determine which option is best for your company.
Lower initial investment. If you have limited working capital, leasing can get you the equipment you need for a fraction of what you would pay if you bought it outright.
Tax benefits. You can usually deduct your lease payments as a business expense. Certain limitations may apply; talk to your accountant or tax professional.
Ease of acquisition. It’s usually easier to get an equipment lease than it is to get a loan to purchase equipment.
Equipment upgrades. At the end of the lease you can turn in the equipment for newer, more up-to-date models. When you buy equipment, especially if you do so on installment, it could be obsolete by the time you pay it off.
Service contracts. Many leases also come with service contracts that cover repairs and maintenance. You may need to pay a small additional fee for a repair, but it’s usually less than you would on equipment that you purchase outright.
Long-term cost. leasing could be more expensive than buying. If you purchase a $1,500 computer with cash, you will have only paid the cost of the computer. If you lease a $1,500 computer, at $60/month for three years, you could end up paying $2160.
Ownership. Because you don’t own the equipment you may not be able to personalize it. You will also not get any equity from owning the machine.
Payment obligations.When you lease equipment you are obligated to make the lease payments, even if you no longer need the machine. However, some companies may let you pay a fee to terminate the lease early. However, keep in mind that you could run into similar issues if you buy a machine on credit.
How to Lease
Some equipment manufacturers may have in-house leasing programs. You can also go to an equipment leasing company, which could have equipment from several different manufacturers.
This calculator can help you determine if you should lease or buy.
Lower long-term cost. If you pay with cash then you will only pay what the equipment costs – no fees, interest, or other additional purchase fees.
Ownership. Once you buy it, it’s yours to do with as you please — useful for equipment that you may need to customize, or that has a low rate of obsolescence.
Tax benefits. You can usually deduct equipment purchase as a business expense. You might also be able to claim a depreciation deduction. Certain limitations may apply; talk to your accountant or tax professional.
Higher initial expenditure. Paying cash up front will be difficult if your company has limited working capital. You will either have to significantly cut into your cash flow, or you will either have to wait until you have enough cash reserves to afford the expense or buy it on credit.
Obsolete equipment. If you need the latest, high-tech equipment to remain competitive, you are better off leasing than buying. For example, if you buy all the equipment for your fitness center, within a few years could be out of date. You will either need to buy all new equipment or keep the outdated equipment, and risk losing your members to the competition.
Higher maintenance and repair costs. Most new equipment should have a warranty, but once it expires you will be solely responsible for all the repair and maintenance costs, or you will have to buy a separate service plan.
How to Buy
If you are paying cash, buying is incredibly easy. Just go to a retailer, or to the manufacturer, pick out what you need and pay for it. Buying on credit could be slightly more difficult depending on the individual lender.