Deciding whether to lease or buy business equipment can be a difficult decision. As a new business owner it can seem incredibly costly to purchase new equipment, but leasing can have different stressors attached. Here at Gallo LLP, we want to ensure you make the best financial decisions for your business. Read our blog to learn more about the advantages and disadvantages of leasing and buying, and what the right choice is for you.
What are the Main Advantages of Leasing Equipment?
There are several advantages to leasing equipment for business purposes.
1. Avoid Technological Obsolescence
Leasing equipment can avoid technological obsolescence. When you lease a piece of equipment you can upgrade as needed rather than using other technology until it breaks or becomes unusable.
2. Improve Capital Flow
Choosing to lease can improve the flow of working capital because it is an easy source of
medium and long-term finance. Leasing requires far less cash upfront which is more beneficial for startups or smaller businesses as it puts less strain on cash flow.
3. Lease Payments are Deductible
Lease payments can usually be deducted as a business expense on your tax returns, which
In turn reduces the overall cost of the lease and helps you at year end.
4. Flexibility After a Term
Leasing is a great option for people unsure how often they will use a piece of equipment and want to test it out before purchasing. Many leases have a purchase option within the original lease, giving you the option to purchase the equipment after the lease term if it will suit your needs.
5. Short Term Availability
If you need to use a piece of equipment for a longer period of time than makes sense to rent, but not long enough to consider purchasing, leasing is a great middle ground option.
What are the Main Advantages of Buying Equipment?
Buying equipment for your business also has its advantages. Here are some of the key ones.
1. You Can Have Specific Requirements
When you are purchasing equipment, you can make sure that you are getting the make, model and year that you are looking for. Leased equipment doesn’t allow for the same specific requirements as purchasing.
2. You Can Make Alterations
When you’re buying equipment, that equipment is yours to do with as you wish. If you are buying equipment that doesn’t quite fit what you need it to do, you are able to make the required alterations to make it perfectly fit for your business.
3. Owning Equipment Increases Company Value
The purchased equipment becomes an asset for your company. Depending on what type of equipment you are purchasing, it can be amortized over a certain percentage which will be recorded as an expense on your income statement.
4. Warranty Availability
When you purchase equipment, you are the warranty holder. If any items require maintenance because of a manufacturer defect, the equipment’s warranty will generally cover the costs for repairs.
What are the Main Disadvantages of Leasing Equipment?
Although there are advantages to leasing, there can also be disadvantages that must be considered when deciding whether to purchase or lease equipment.
1. Increased Costs
When you’re leasing, the total cost over the lease term is typically quite a bit more than a purchase price. Interest rates on leases also tend to be higher than financing costs for a purchase.
2. Fewer Options
Typically, there is a limited variety of options to choose from. If you are looking for a very particular piece of equipment, you are much less likely to find it through leasing.
3. Less Maintenance Control
Maintenance is up to the leasing company as to what they feel should be covered, so there is a chance you’d be paying out of pocket for repairs. You will also have less control over the timeline for repairs and maintenance, so you risk the possibility that you’re waiting for long periods of time while the equipment is down.
What are the Main Disadvantages of Buying Equipment?
Buying equipment isn’t always the best option for your business. Here are some primary disadvantages of buying equipment.
1. Large Up-Front Costs
When buying equipment, there will need to be larger down payments which can cause an issue for a company’s cash flow. Owner costs tend to be quite expensive, including monthly payments, insurance, maintenance, and repairs. If your company has any cash flow issues it can be difficult to afford expensive repairs.
2. Equipment Can Become Obsolete
When purchasing equipment it is generally understood that you have the same piece of equipment for much longer than a lease. This can be difficult if the technology becomes antiquated but you’re still expected to use the equipment because of the sunk cost.
Should New Businesses Lease or Buy Equipment?
Deciding whether to buy or lease equipment depends on the business, but generally it is recommended that a new business leases their equipment first. This is because new businesses typically don’t have the cash flow to put down a large down payment. Furthermore, as a new business you may not know the best brand or model of equipment that will work best for your business, and leasing allows more flexibility and trying different equipment out. Because of this, leasing with a purchase option is usually the best option for new businesses.
When is the Right Time to Buy Equipment?
There is no clear and perfect answer on the right time to buy equipment versus leasing it. If you’re deciding if you should buy or lease equipment, here are a few questions to ask yourself:
- Does my business have enough cash on-hand to make a down payment without sacrificing other aspects of the business?
- Is the equipment going to be obsolete before the loan is paid?
- How expensive would the maintenance be?
- Will I be using the equipment for longer than the potential lease term?
- Will I want to make any modifications to the equipment to better suit my needs?
Once you’ve asked yourself these questions and done research on the price of leasing compared to buying, you can make an informed decision on if it’s the right choice to buy your business equipment.
How can Gallo LLP help businesses determine if leasing or buying is right for clients?
Gallo LLP can assist you in your financial planning and business decisions. We will perform a Net Present Value calculation and will analyze which option for acquiring business equipment will work best for you in the long run. We’ll look at your monthly cash flow statements, the draft lease agreement, and the draft purchase agreement to calculate which option provides the most cash savings and results in a more favourable tax advantage.
Gallo LLP has a team of highly experienced accounting professionals. We’re ready to provide consulting services and financial advice to ensure you make the best investment decisions for your business.