Should You Lease Or Purchase Equipment-The Pros And Cons

business-equipment
Establish whether to purchase or lease business equipment. Image: Flickr

Whether you decide to buy or lease business equipment depends on your circumstances. The fact is, small businesses find it hard to raise capital hence opt to lease equipment, ranging from computers to office furniture.

Leasing can also be a good option for business owners who require equipment that need upgrading every other year while buying equipment can be a better choice for established businesses.

Bear in mind that every business is unique and your decision to lease or buy equipment should be on a case-by-case basis. Here’s what you should know about both options.

Benefits of Leasing Equipment

Leasing equipment preserves capital and offers flexibility though it may be costly in the end. If you require tech-savvy equipment for operating your business every 3-5 years or so, this is the best option because it enables you to upgrade to advanced equipment. Some of the benefits include:

  • Less Initial Cost

The major advantage of leasing equipment is that it enables you to obtain assets with minimum initial expenditures. You’ll find that equipment leases seldom need a down payment, so you can acquire the necessary goods without affecting your cash flow significantly. Furthermore, you can use cash for other areas such as marketing and inventory.

  • Upgrade Equipment

Leasing enables businesses to address the issue of obsolescence by accessing leading and innovative business equipment. In some industries, adapting to technology also helps businesses remain competitive.

Bear in mind that we’re in a technological world where upgrading is necessary. Once the lease expires, you have an option to upgrade, continue the contract, or simply purchase the equipment at fair market value.

  • Tax Deductible

This option makes you eligible for tax deductions by offering income tax benefits. When you lease equipment, it’s not an asset, automatically saving you from the depreciating capital equipment cost.

  • Flexible terms

Leases are typically easier to acquire and have flexible terms than loans for purchasing equipment. This can be a huge advantage if you have bad credit or have to negotiate a lengthy payment plan to decrease your costs.

Disadvantages

  • Higher Cost Overall

While leasing allows you to acquire equipment without the need for a lump sum payment, it’s almost always more costly than buying. This is because you pay the equipment cost together with the company charges.

Furthermore, when the term ends, you have to pay a fixed monthly amount to continue using the equipment. Consequently, you’ll pay nearly double the amount over the years without owning the equipment.

  • No Ownership

With this option, you don’t build equity in the business equipment. Unless it becomes outdated by the end of the lease, the lack of ownership is a huge disadvantage.

  • Restricted Product Availability

Leasing offers limited options unlike purchasing where business owners can access any model of equipment depending on their business needs. With leasing, you can only choose from a restricted range of products provided by the leasing company.

Benefits of Buying Equipment

Buying equipment appears to be easiest approach when it comes to obtaining new equipment, which becomes your property. Nevertheless, this option isn’t suitable for everyone. Some of the benefits include:

  • Ownership

Ownership is a major advantage of purchasing equipment. This is particularly true if the property has a long valuable life and is unlikely to become technologically obsolete in the near future, for instance farm machinery or office furniture.

  • Likelihood of depreciation deduction

While not all equipment purchases qualify for Section 179 treatment, you can still obtain tax savings for nearly any business equipment via depreciation deductions.

  • Selling the Equipment

As the owner of the equipment, you can sell it at your convenience without engaging in any agreements and formalities. Additionally, you can repair or modify it as per your requirements.

Disadvantages

  • High Initial Expenses

When you buy equipment, high initial expenses are nearly inevitable because you must pay upfront costs. This typically becomes a huge concern for entrepreneurs who lack abundant monetary resources.

  • Outdated Equipment

Although ownership is possibly the biggest advantage, it can be a disadvantage. If you buy high-tech equipment, you face the likelihood of dealing with technologically obsolete equipment. Consequently, you might have to reinvest in new equipment.

  • Maintenance

This can be problematic for most entrepreneurs since it can be very expensive over time due to wear and tear.

Final Thoughts

When establishing whether to lease or purchase equipment, try to work out the estimated net cost of that equipment. Ensure you consider resale value and tax breaks when making the calculation.

After establishing the cost-effective options, consider other intangibles. Regardless of your decision, make sure it suits your business needs and situation.

Dailey Bookkeeping Services is a Xero Certified SILVER Partner and a QuickBooks Online Certified Advisor, so if we can help you with your business equipment needs, just give us a call, we would love to help you!  The owner, Jacqueline Dailey is a Certified Public Bookkeeper, an Advanced Certified QuickBooks and QuickBooks Online ProAdvisor, a Sleeter Group Certified QuickBooks Consultant and a Xero Certified Silver Partner. We work remotely so we can work with any company located in the U.S. If we can help you with this process or provide you with custom reporting, please give us a call. If we cannot help you, we will refer you to someone who can!  Feel free to visit our website at http://www.daileybookkeeping.com.

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