Should You Lease or Buy Equipment?
In your small business, you may use a variety of equipment, including tools, vehicles, excavators, computers, and landscaping tools. You can lease or buy this equipment. Because both options include risks, compare both options.
Benefits of Leasing
- Save money right now. Equipment can cost hundreds of thousands of dollars upfront to purchase. A lease requires a smaller initial payment and eliminates interest charges. The payments are tax deductible, too, which reduces the item’s net cost.
- Enjoy flexible lending terms. Maybe you have bad credit and can’t get a traditional loan. Most leasing companies offer flexible lending terms, giving you access to the equipment you need.
- Easily upgrade. When your lease ends, upgrade to new equipment and its new technology right away instead of waiting until you save enough cash to buy an upgraded item.
Disadvantages of Leasing
- Pay more overall. Leasing and its fees generally cost more than buying in the long
- Forego ownership. When you lease equipment, you don’t own it and can’t build equity, which is troublesome if your business primarily uses equipment that retains its value over time.
- Fulfill the lease obligation. You must fulfill the entire lease term obligation even if you no longer need or use the item. Break the lease, and you’ll owe a large early termination fee.
Benefits of Buying
- Earn tax benefits. In the first year of ownership, you could deduct the full cost of the equipment you purchase. Talk to your accountant for details.
- Take a depreciation deduction. You may be able to deduct depreciation on certain purchased assets.
- Build equity. Because you own equipment, it counts toward your equity and can help you grow your business.
Disadvantages of Buying
- Spend more money initially. To buy new equipment, you need a large down payment which can deplete cash reserves. Buying could also limit your future purchasing ability until after you repay the loan.
- Pay expensive financing fees. Purchase equipment with a loan, and you’ll pay interest on the balance at a rate as high as 20 percent per month, a significant cost over time.
- Accumulate obsolete technology. Certain types of equipment become obsolete as new technology is introduced, and you could be stuck with unusable and unsellable equipment. Your business could also suffer if you can't afford to upgrade to the new technology you need to operate.
Ultimately, the decision to lease or buy equipment depends on your business. Compare the benefits and disadvantages of leasing and buying as you choose the right option for you. Be sure to factor in the cost of insurance on the item, too, as you protect your investment and keep your business running economically.