You just realized you need that sparkly new equipment to make your whole production process faster and cheaper. You’ve decided on a brand and a model and you’re ready to get it, but then a question starts to haunt you…
Leasing vs buying: which is better?
Now you’re on the fence concerning your business equipment.
If that’s your situation, don’t worry, you’re in good company. Many business owners weigh the pros and cons of each option and are still unclear what to do.
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 stable path toward success.
In this article, you’ll read straightforward explanations about leasing vs buying equipment so you can decide what’s best for your business.
Is it better to lease or buy equipment?
The answer is not that straightforward. It depends on your company, your industry, and your needs. Because no two businesses are the same, you need to consider the advantages and disadvantages of leasing vs buying and choose the most suitable purchasing option.
You also need to take into consideration two crucial aspects:
- for how long you’re going to use the equipment
- if you have enough capital to make the purchase
But you also need to weigh the pros and cons of each of the options. Next up, you’ll find the advantages and disadvantages of leasing and buying so that you can choose 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.
Why do companies lease rather than buy? In the short term, leasing tends to be cheaper than buying. Especially if you only plan to use said equipment for a brief period.
There are two types:
- Operating lease, where the equipment is usually leased for a shorter period.
- Finance lease (or capital lease), where the rental is more long term. It’s usually for when you plan to buy the equipment when the contract is finished.
Pros of leasing
Leasing has a lot of advantages (no wonder why so many people decide to lease instead of buy), here are the most important ones:
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 typically require a down payment. If one is necessary, 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 amount 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 possible that the company may not fix the equipment on your timetable.
Cons of leasing
What are the disadvantages of leasing? Like with anything else, leasing also has disadvantages. Make sure to study them to make sure they don’t outweigh the advantages.
Early termination fees
When you sign a lease agreement, you commit to making payments for the duration of the contract. Depending on the deal, 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 generally extended, 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 it once you’re finished using it.
Is leasing better than purchasing?
If leasing is the most cost-effective option for your business, then you can move forward confidently. You need to see if, depending on your business needs, leasing has more upsides or drawbacks.
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.
Pros of buying
Maybe leasing was not what you were looking for. But is buying what you need? Take a look at its advantages:
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.
Cons of buying
Make sure to analyze these disadvantages before you decide on buying:
Business equipment may become obsolete
Technology is updated regularly, so 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 equipment?
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 have the financial needs to pay for the equipment you need. And other times, you may need to get a loan to get the capital you need.
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?