When determining whether to buy or lease equipment for your business, there are a number of factors you should consider.
When it comes to purchasing equipment, owners and executives often feel there is long-term value in owning equipment used in their operations and, in many cases, purchasing offers the best return on investment. But keep in mind that purchasing equipment outright can also increase short-term cash outflows exposing the company to additional costly risk. Additionally, you may also experience downtime while the equipment is being placed into service that your business – and just as importantly, your customers – cannot afford. Finally, obtaining traditional financing for equipment purchases may be challenging if the business has a less-than-optimal credit history.
A lease can provide a more access to equipment with lower up-front costs and consistent monthly payments, which can free up cash for other purposes. You can also be up and running quickly, with less downtime. But because you do not own the equipment, you may not have the ability to make modifications or customizations that would make the equipment more impactful to your business.
Also consider:
Flexibility: A lease can offer a wider range of terms and options. Additionally, if you operate in a rapidly-changing technological environment, leasing may be a better option because it can allow you to replace outdated equipment in a more timely and affordable manner, helping your business stay ahead of the technological curve and remain competitive.
On the other hand, a purchase may may more sense in when considering equipment with a long usable life. If modification or customization is important, then traditional purchasing may be a better option. You may ultimately be stuck with it, but the equipment will better serve its intended purpose, making it a solid investment over an extended period of time.
Tax Implications: Lease payments are usually expensed as incurred, while purchased equipment is usually subject to depreciation for both financial reporting and tax purposes. However, for purchased equipment you may be able to take an accelerated depreciation deduction under Section 179 of the Internal Revenue Service code or take advantage of other accelerated depreciation methods if Section 179 cannot be leveraged.
Ownership: Purchasing provides a sense of ownership, allows the owner to use the equipment for an extended period of time, and may even provide residual value to the owner. If the equipment becomes obsolete and is not able to be sold as-is, then it may still have resale value as scrap.
Cash Flows: In the case of purchased equipment, the owner is responsible for repairs, regular maintenance, warranties, and insurance, which can all add up over time.
In the short term, leasing can free up funds for other purposes. However, a lease can be more costly in the long run since you are paying a premium over what it would cost to purchase the equipment outright. Additionally, maintenance provisions associated with leasing arrangements usually place responsibility for repair and maintenance on the lessee. Finally, cash outflows for leased equipment will continue beyond any original payoff period if you decide that you need to continue using the equipment past the end of the lease term.
Thorough consideration of the pros and cons of leasing versus buying can help ensure that you have access to the right type of equipment over the long-term, as well as help minimize taxes and maximize cash flows.