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 about what to do.
Whether you’re budgeting for updating your commercial kitchen equipment or you’re in urgent need of heavy equipment for your construction company, 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. (Spoiler alert: buying with the help of a loan is usually your best option)
We’ll also present a great option to buy equipment even if you don’t have the funds to do it.
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.
What are the pros and cons of leasing and buying?
Keep reading to find out if leasing or buying works best for your business. You’ll be able to compare the advantages and disadvantages of each option.
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.
Remember 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.
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 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 and other factors, determines whether leasing vs buying is the better option.
Buying Business Equipment
Buying is a great idea. In fact, it is recommended, especially when you know you’ll use the equipment for all of its viable life.
Sometimes you can get a credit with the seller so that you can pay for the equipment in several monthly installments. This is a great option to afford the machinery you need, but, of course, not all sellers offer this option, or you might not be able to qualify. That’s why many businesses decide to get a business loan as equipment financing.
Here’s a calculator that can help you know how much a loan would cost you so you can decide is buying is the right option for you:
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.
Of course, this is very easily solved: you can get a small business loan to pay for the equipment you need. This is known as equipment financing. This is especially a good idea because it’s similar to leasing; you make fixed monthly payments. The difference is that you are the owner of the equipment.
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 getting a small business loan is a great option. This will allow you to be the owner of that machinery you need and help you build a credit history and score. Surprisingly, loans are not as expensive as many people think, and they will give you the boost you need.
Is it better to buy or lease? Infographic
In the end, it all depends on your needs and what your finances allow you to. But in order to help you make a decision, here’s an infographic that can help you decide.
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 buying is better than leasing and vice versa based on your business’s current growth phase.
But if you’re only leasing because you don’t have enough money to buy the equipment, there’s an easy fix! You can get a loan to receive the capital you need. This way, your journey towards success won’t be hindered by a lack of capital.
Think about it, with a small business loan you will make the same monthly fixed payments that you’d make when leasing, but at the end of the day… you’ll be the owner of the equipment!
That’s why buying equipment with the help of a loan is an amazing alternative.
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?