Buying or leasing business equipment
Which is the better option for your business?
There are advantages and disadvantages to leasing or purchasing equipment. The best choice depends on a number of factors, including the cost of the item, its long-term use and your cash flow. Following are a few things to consider when making your decision.
Efficient use of capital.
Leasing equipment, which is simply a monthly expense, can effectively increase your borrowing power and allow you to grow faster. In many cases, a lease allows for 100% financing with little or no money down.
Leasing is also an excellent option when you need to preserve capital. However, it can be more expensive in the end because interest rates on leases are typically fixed and higher than on loans or lines of credit.
If you buy, depending on the cost of the equipment, the initial outlay may simply be too high. Borrowing may be an option, especially when interest rates are low. Yet even the down payment may be out of reach if the equipment is very expensive – 20% is typically required.
Borrowing to purchase may tie up your line of credit, which is better suited for accounts receivables or inventory. Lenders may place performance requirements on future financial results to ensure you are able to repay the loan, which could hamper your ability to respond to changing market conditions.
Equipment usage and obsolescence.
With leasing, that unaffordable equipment could suddenly be within reach. If the equipment is needed for a one-time, either shorter-term project or needs to be upgraded frequently due to the amount of use or advances in technology, leasing could be the way to go.
If the equipment is essential to the long-term operation of your company, has a long usable life, and is not subject to frequent technological advances, purchasing could be your best option.
Cash management outlay vs. flow.
The primary advantage of leasing is the ability to acquire assets with minimal initial cash outlay. Since in many cases no down payment is required it is more efficient from a sales tax perspective since taxes are paid on the payment amount, not on the total cost of the equipment.
If you are not purchasing the equipment outright, make an informed decision by comparing the total up front and monthly costs of a lease and a loan. If your company's cash flow would be significantly affected by a large outlay of cash to purchase, consider leasing.
In general, leasing will be more expensive than buying if you have the equipment for a longer term. If you buy, you can resell the item. Moreover, if you buy used the overall cost factor weighs even more heavily in favour of the "buy" option. Of course, for purchases that are virtually obsolete within a relatively short period such as computer systems, or have high depreciation, the resale value will not be as great a consideration.
Getting the go-ahead to lease.
If you need to act quickly, leasing will get you the equipment you need when you need it. Leases are usually easier to obtain than loans, depending on your financial position, and take less time. Leases are based on the fact that the equipment itself is the collateral, not your home or other assets.
Leases also have more flexible terms than loans and can be tailored to your cash flow should your business revenue be impacted by seasonal or cyclical changes.
When your equipment needs change.
What if your company takes a new direction and you no longer require that specific piece of equipment? If you purchased the item, you can always sell it, although you may not be able to find a buyer when you need it, and may have to sell it at below market value. If you have leased it, you are obligated to continue making the lease payments for the term of your lease, whether you are using the equipment or not.
Lease or buy? The final decision.
When deciding whether to buy or lease, try to determine the net cost of the asset with the help of your accountant. Factor in tax issues (sales tax, depreciation, deductions) and resale value. After deciding which option is the most cost-effective, consider the other intangibles described above to make your final decision.
If you've decided a lease is the way to go, keep the following in mind, and discuss your options with your leasing professional.
- You can lease new or used.
- You can negotiate the length and repayment terms of the lease.
- There is typically the option at the end of the term to buy the equipment, upgrade, take out another lease.
If you've decided to purchase, there are a variety of loans available in addition to setting up a line of credit.