Are you on the fence concerning leasing vs buying business equipment?
If so, you’re in good company. Many business owners weigh the pros and cons of each option and are still unclear what to do. Because no two businesses are the same, a business owner must weigh the advantages and disadvantages of leasing vs buying and choose the most suitable purchasing option.
Whether you’re budgeting for updating your commercial kitchen equipment or wanting to equip your facility with a new communication system, understanding the differences between leasing vs buying puts you on a solid path toward success.
In this article, you’ll read straightforward explanations about leasing vs buying business equipment so you can decide what’s best for your business.
Leasing Business Equipment
Leasing equipment is basically renting it so that you can use it in your business. As such, you have to make periodical payments for the leased equipment.
There are 2 types:
- Operating lease, where the equipment is usually leased for a shorter period.
- Finance lease (or capital lease), where the lease is more long term. It’s usually for when you plan to buy the equipment when the contract is finished.
Pros of leasing:
Doesn’t reduce cash flow significantly
If you’re concerned about overextending your working capital, there’s less expense initially when leasing business equipment.
Leasing equipment doesn’t normally require a down payment. If one is required, it’s usually a nominal fee. Plus, you can hold onto capital to grow your business, add employees, or take out a loan to cover improvements.
Payments are manageable
By having the same payment each month, you can budget your finances better. Likewise, the cost can be deducted as an operating expense.
Option to buy equipment
When your lease period expires, you can purchase the equipment. You could also update to newer equipment by signing a new lease agreement.
No maintenance costs
If the equipment breaks down, it’s up to the leasing company to make repairs.
Potentially, you could save hundreds if not thousands of dollars on maintenance costs by leasing business equipment.
Keep in mind that even though you forgo paying maintenance costs, you abide by the leasing company’s maintenance schedule. It’s very possible, the company may not fix the equipment on your timetable.
Cons of leasing:
Early termination fees
When you sign a lease agreement, you commit to making payments for the duration of the contract. Depending on the agreement, it may be possible to terminate the release early; however, the leasing company will charge hefty fees to do so.
In the long run, you pay more
Buying business equipment costs less when you can pay cash. When making lease payments, you add interest to the total cost and end up paying more for the business equipment.
No way to build equity
Because you don’t own the business equipment, you can’t sell it to recoup some of the costs. Furthermore, you are limited as to which common tax deductions you can take when owning equipment vs leasing it.
Short-term leases aren’t usually an option
It’s possible you need a piece of equipment for just a few months. And because lease agreements are usually long, you’ll continue to make payments while the equipment sits idle and takes up storage space. In this situation, you could get a loan for the equipment, and rent the equipment once you’re finished using it.
Are their more upsides to leasing to outweigh any drawbacks? If leasing is the most cost-effective option for your business, then you can move forward confidently.
Your current financial situation along with your short and long-term goals are other factors to determine whether leasing vs buying is the better option.
Buying Business Equipment
Buying is a great idea when you know you’ll use the equipment for all of its viable life.
Many businesses decide to get a business loan as equipment financing.
You can take tax deductions for loan interest, depreciation, insurance and repairs. Depending on the asset, you may be able to deduct a portion of the costs.
Contact your tax professional for advice on all your options.
You’re the owner
Rather than rent or lease equipment, it’s yours to use or sell. You can list the equipment as a business asset when purchased outright and may be able to use it as a capital allowance for tax purposes.
Buy what you want
Leasing companies keep a limited stock of products.
If you buy, you can choose the exact brand and model that suits your preferences and the needs of your business.
Business equipment may become obsolete
Technology is updated regularly so it’s possible that your equipment may become out-of-date. The resale value would be far less than the amount you paid initially or you may not be able to find a buyer.
You’re responsible for maintenance costs
If the equipment breaks down, you’ll have to pay for maintenance costs which may be an additional expense you can’t afford.
Reduces available cash
Most business owners don’t have extra cash to pay for equipment without getting a loan. If you get a loan, do you have money to make a down payment if it’s required? Is there enough cash flow to cover a loan payment and still have a cushion of available funds?
You can’t return the equipment
If the equipment proves to be unsuited for your operation, you can’t return it for a refund.
Do the tax incentives carry more weight when buying equipment or are you more concerned about whether there’s enough money to go around to cover expenses?
Startups don’t usually have surplus cash so leasing is a better option. Other businesses want to build a credit history and score so they get a loan to buy equipment.
What’s better for your business: leasing vs buying?
You’re an expert when it comes to your business. You know its ins and outs and what makes it tick. Because you’re the decision-maker, sometimes leasing is better than buying and vice versa based on your business’s current growth phase.
Sometimes you can pay cash for equipment and other times you may need to request a quote for a business loan. At Camino Financial, our motto “No Business Left Behind” is the impetus for everything we do. We’re a family-oriented lender and understand the complexities of running a business day in and day out.
Should you decide to buy business equipment, we’re ready to help you choose the best financial solution for your business.
Why not let us help you move forward to make your financial goals a reality?