Should Your Business Buy or Lease Needed Equipment?
There’s always a buzz around installing a new piece of equipment at work. Whether it is a $100 coffee maker in the break room or a $100,000 assembly machine on the factory floor, people get excited. And while both should hopefully make a positive difference, it is only the larger piece that can decipher whether your business succeeds or fails.
So, deciding on new or used equipment can be a very important conversation you will want to have with the powers that be.
First Things First
Before you start to consider the pros and cons of buying or leasing, you need to answer some questions about your business and the use of this new equipment.
- Can you afford to buy it outright, or will you need a loan? A loan will commit you to a schedule of payments no matter what happens to the machine.
- What is your company’s current financial situation? When interest rates are low, it may be a good time to purchase capital items on credit.
- What are your long term expectations for this machine? Will it be out of date by the time a lease is complete, or will it go on for many more years?
- Will the equipment be in use constantly or periodically?
- How will your financial security be rated? If you are a new business in an untried market you may have difficulty getting a large loan. Whereas, a leased machine provides its own security.
- Do you have other areas in your business where you need to be spending money? Can you afford to tie up cash in capital purchases just now?
One you have asked yourself all those questions, it’s time to see how leasing and buying compare?
Advantages of Buying
You are the owner of the equipment. You can modify it without asking for permission, and if it no longer suits your needs, you can sell it.
The equipment is an asset on your balance sheet, giving more weight to your business.
If you plan to use the equipment for a long time, buying is more economical than leasing.
There may be tax advantages in owning the capital assets, and possible federal or state incentives for purchasing items using green technology.
You have a more direct relationship with the manufacturer. Where machinery is made to a company’s specifications, as at Reliant Finishing Systems for instance, you have access to the designer and builder throughout the life of your equipment.
Disadvantages of Buying
The upfront cost will take up a lot of capital or require you to get a business loan that cause you to incur debt.
You have sole responsibility for maintenance, repairs, and insurance.
If the equipment becomes obsolete, you may lose a great deal when you dispose of it.
Advantages of Leasing
For the entire period of the lease you know exactly what your payment is so you can budget for it.
Your monthly payment will include most likely include maintenance on the equipment so you won’t have unexpected surprises.
If your equipment becomes outdated, you simply can turn it in for a new machine at the end of the lease.
You can keep your capital available for other purposes such as marketing or R & D.
Leasing has tax advantages in that the entire cost of the lease can be tax deductible.
Disadvantages of Leasing
The lease will come to an end, and then you will be faced with the same decision again.
By the end of the lease term, you will have paid all or most of the capital expense. But if you still need the equipment, you will either have to purchase it or pay a final settlement in order to keep it. Or, enter into a new lease all over again.
The leasing company has to make money on the deal, so overall you are highly likely to be paying more.
It is unlikely you will get an unlimited range of choices for your leased equipment. The leasing company will generally only offer you equipment that they feel suits your business’ needs.
A Complex Choice
The general pros and cons of leasing vs buying are just that—generalities.
Many companies choose to lease their equipment simply because it allows them to reserve capital and cash flow is a critical component to any business type. Should you choose to go this route, there are a vast range of different deals available to you for both leasing equipment and business loans.
NOTE: If you are making a major investment into a new plant for example, the advice of an experienced accountant is highly advised.
Ryan Norton has a great deal of experience in the manufacturing industry. He uses his experiences in the day-to-day operations of business to write articles that appear on a selection of business blogs.