Every business needs some kind of equipment, whether it’s a cell phone or a fleet of dump trucks. Fortunately, business owners have the option of either purchasing or leasing just about any kind of equipment. But how do you decide whether leasing or purchasing is best for your business? Here are some basic questions to ask and factors to consider:
What type of equipment do you need?
Most business experts recommend leasing equipment that needs to be regularly updated, upgraded, or replaced. Computers and other technology equipment are perfect examples. Purchasing a computer system that will need to be significantly upgraded in a few years doesn’t make a lot of sense if you can get a lease agreement that includes the option of upgrading equipment.
However, if you need more durable equipment or customized items, purchasing might be a better choice. For example, it may make more sense to finance a fleet of trucks customized for your business if you plan to use them for 10 years.
How much cash do you have available?
Purchasing typically costs more up front, either to make the purchase or secure financing.
Leasing, on the other hand, often requires little or no initial cash outlay. In many cases leasing offers lower monthly payments than purchasing, making it attractive to new business owners just getting started. However, because you do pay interest on a lease, the long-term costs can ultimately be more than purchasing.
Is used equipment an option?
If you are able to use pre-owned equipment, you may want to compare its purchase price to the cost of leasing new equipment. In most cases, used equipment cannot be leased. But, again, if you do some research, you may be able to find used equipment in good condition for a competitive price.
Do you want to be responsible for maintenance?
When you lease equipment, the leasing company is typically responsible for all maintenance and repairs. This can be beneficial because you do not have to pay for each repair or service. However, you have to rely on the company to be responsive to your requests. In many cases, you cannot have the equipment serviced by another provider other than the leasing company. And if there’s a significant delay in repairing equipment, it could negatively impact your business.
If you own the equipment, you have control over the service, repair, and maintenance of the equipment. But you also have to pay the bill.
Is ownership important to you?
You do not build any equity when you lease. You are simply paying to use the equipment. Some leases do have buy-out options that allow you to purchase the equipment when the lease term is completed, but this requires additional capital outlay.
If you prefer to own your equipment with the hopes of eventually reselling it to recoup some of the cost, then purchasing may be more appealing to you.
What about tax benefits?
Both leasing and purchasing offer some tax benefits, however, which option will be more beneficial to you depends on your specific situation.
You should always consult your tax advisor and carefully consider the tax implications when deciding which option is right for you. Because there are many types of leases and purchasing options available, it’s also important for you to consult your financial advisor and attorney before entering into any lease or purchase agreement.