When lending to business for equipment I always seem to get a similar question. Is it better for me to lease or buy a piece of equipment? For business owners who need certain equipment to operate and make their business successful, there is a lot to consider. It goes beyond just looking at the overall costs of buying or leasing a piece of equipment, you also need to consider maintenance, tax deductions, flexibility and more.
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. There are certain situations when the cost-benefit of one option may strongly outweigh the other.
Let us first look at leasing.
Pros:
- Leasing equipment is a good method for equipment that needs to be updated often because you can acquire or upgrade to update technology easier and quicker. If you will need to update your equipment on an annual basis to remain competitive, leasing prevents you from being stuck with outdated equipment.
- There can be less expensive up-front costs with leasing because in most situations, a lease has a lower payment that if you purchase. If your business is in the early stages the lower lease payment helps from a budgeting standpoint.
- Leasing is often 100% tax-deductible as an operational expense under the 179 IRS Tax Code. *However, I always encourage a business customer to consult with their accountant when discussing tax implications on leasing or purchasing equipment.
- Leasing can be flexible and offer more options when it comes to the type of equipment you get. You aren’t necessarily as restricted by up-front costs or other hesitations to try something new that may help your business.
- Under certain lease agreements, you don’t pay for maintenance. If something breaks or has issues due to normal wear and tear, the leasing company is in charge of fixing the equipment.
Cons:
- With leasing, you don’t own the equipment; it gives you absolutely no equity. You won’t have the option to sell the equipment once you are finished with it, so there is no potential to get back some of what you have invested over time.
- The available length of lease terms may be longer than you need. Strict agreements may force you to pay for and keep pieces of equipment for a longer time frame than you feel is necessary, resulting in wasted time, funds and space. I mainly see this being specifically difficult for larger pieces of equipment that a business needs for a short periods of time but don’t have storage space for it.
- Maintenance can be up to the leasing company’s specifications, so it may be difficult to get things fixed. In some cases, you may disagree about what the leasing company should be responsible for, and when they do proceed with repairs, you may have to wait to get things fixed that need immediate attention. This issue may also cause you time and money. If your equipment isn’t working then chances are you or your staff isn’t working either.
- Availability of products may be limited depending on the stock of the leasing company. Your choice of brands or models could potentially be out of stock or not carried at all, so you could have to settle for something else.
NEXT WEEK: Part Two of Buying vs. Leasing! Stay tuned to learn more about the pros and cons of buying equipment for your business.
