Buy vs lease equipment: Business Equipment: Buying vs Leasing
There are many technology innovations that have come and gone, and various business equipment can face similar obsolescence. It’s a risk that needs to be mitigated if you want to avoid unanticipated replacement costs and stay one step ahead of your competitors. By the time you finish paying off your loan for the equipment you purchased, it may be outdated, and its value will be far from what you paid for it. Now let’s look at the advantages and disadvantages of buying business equipment.
Try our payroll software in a free, no-obligation 30-day trial. This is not intended as legal advice; for more information, please click here. Get to know the cons before deciding which route to take when it comes to equipment. In some cases, you may be able to purchase the equipment at the end of the lease depending on what is in your contract. Depreciation is computed on the basis of the 200 percent declining balance method.
- Equipment like heavy machinery or computers depreciate quickly, and if you purchase them new, you’re left owning an asset that is worth a fraction of what you paid for it just a few years later.
- When it comes to running a business, you need to be savvy with your money to succeed.
- Try our payroll software in a free, no-obligation 30-day trial.
- You are free to lease new, higher-end equipment after your lease expires.
- Ownership and tax breaks make buying business equipment appealing, but high initial costs mean this option isn’t for everyone.
When it comes to an equipment lease vs. loan, there are some factors that may deter you from choosing the leasing option. Although it can be appealing to own the business equipment yourself, it can be expensive to purchase it outright. Leasing can be a good option if you want to conserve cash flow.
Need Business Insurance?
Or, if you still like your equipment, you can make arrangements to extend the lease. Although ownership is perhaps the biggest advantage to buying business equipment, it can also be a disadvantage. If you purchase high-tech equipment, you run the risk that the equipment may become technologically obsolete, and you may be forced to reinvest in new equipment long before you had planned to. A computer system that costs $5,000 today, for instance, may be worth only $1,000 or less three years from now.
Some leases give you the option to cancel the lease if your business changes direction and the equipment you leased is no longer necessary, but large early termination fees always apply. When you start narrowing down on the type of equipment your business needs, it’s a good idea to thoroughly consider the pros and cons of leasing versus buying. In certain circumstances, the cost-benefit of one option may strongly outweigh the other.
Spend Less on Equipment Up Front
This can be a significant advantage if you have bad credit or need to negotiate a longer payment plan to lower your costs. This is true of purchasing equipment as well, but with an equipment lease, you may be able to deduct your rental payments as long as you are using the equipment in your business. The only caveat to this is if the IRS recharacterizes the lease as a sale, such as in the event that you decide to purchase the equipment at the end of the lease. If you have excess capital and a strong cash flow, buying may be the best option for your business. That way, you don’t have to stress over financing or lease agreements. When it comes to running a business, you need to be savvy with your money to succeed.
Not every business can afford to drop hundreds of thousands of dollars on expensive equipment, but taking out a loan can ensure that you get the equipment you need without eating up all your cash. There are different types of leases, including the capital lease, sale leaseback, TRAC lease, and others. 360 Degrees of Financial Literacy is a FREE PROGRAM of the nation’s certified public accountants to help Americans understand their personal finances through every stage of life. With leasing, you have access to the equipment for the life of the lease.
You’re Responsible for Maintenance Costs
There are a lot of factors that go into a decision about leasing vs. buying equipment, along with pros and cons. For example, credit scores sometimes affect your ability to obtain a competitive loan rate. Your company’s tax situation could also play a role, although lease payments are often tax deductible as a business expense. Companies big and small are looking for ways to streamline the budgeting process and forecast expenses.
Cash flow should be reserved for critical needs and initiatives that generate ROI, or be used for unexpected expenses or liabilities. Some equipment purchases can cost thousands or hundreds of thousands of dollars and require a major outlay of capital. Leasing allows for payments and maintenance costs to be stretched out over a longer period of time. Many businesses prefer to lease equipment because it helps them conserve cash flow (typically lease payments are lower than purchase payments), though there are benefits to ownership as well. For business owners who need certain equipment like computers, machinery, or vehicles to operate, there is a lot to consider. Beyond simply weighing the overall costs of buying or leasing a piece of equipment, you also need to consider maintenance, tax deductions, flexibility and more.
Buying Business Equipment
A case study analysis of leasing business equipment compared to purchasing the same equipment. Did you know that approximately 80% of U.S. companies lease some or all of the equipment they use to conduct business? Now that we’ve done a little lease vs. buy analysis, it’s up to you to determine whether buying vs. leasing is the best option for your business. Typically, loans require a larger down payment up front, which may mess up your cash flow if you don’t have a chunk of cash laying around. Once you finish paying off your equipment financing, the asset is yours to do what you please with. You could sell it and recoup a little of the investment you made, then turn around and buy newer equipment.
A major disruption to business is fluctuating or unexpected expenses from one month to the next. If forecasting expenses and managing budgets and cash flow are important to you, leasing is an ideal solution. A lease offers fixed payments over time, providing your business with consistency for planning purposes.
Leasing has some great financial benefits, such as lower payments and not being saddled with an outdated piece of equipment. But buying, on the other hand, may be more affordable in the long run, and you have an asset you can then sell. Many don’t consider that, in addition to the purchase price, there are also maintenance costs through the life of the equipment you are buying, so factor these into the total cost of buying equipment. Despite the fact that your monthly payments may be lower with a lease than an equipment loan, in the long run, you will likely pay more for a lease, and then you don’t have an asset to show for the expense.
You’ll be responsible for the equipment’s maintenance costs during the lease. You’ll also want to consider your end-of-term stipulations and which options are best suited for your business model and financial situation. Leasing provides flexible options that are often lacking in standard loan agreements. A localized leasing agent who is familiar with your local market usually has greater flexibility and is able to provide more lease agreement options. Why do many businesses choose to lease equipment rather than buy it? These top four benefits of leasing vs. buying equipment should be convincing enough.