There will come a time as a small business owner, when you find yourself in need of new equipment to continue running your business effectively. When considering whether to buy or lease equipment for your small business, you need to consider certain factors. These factors can help you decide which option is best for you and the future of your small business.
Sometimes leasing is better, while other times purchasing the equipment is more cost effective. When determining whether to buy or lease, not only do you need to weigh the overall costs of leasing vs. purchasing, but also take into account the cost of maintenance, tax deductions, flexibility, and so on. As such sometimes leasing is better than buying, but not always. Here are some factors to consider for your small business to when deciding whether to buy or lease equipment.
First, determine the type of equipment your business needs. Secondly, you should search and locate the right equipment before deciding whether to lease or buy the same. If you do your research well, you will realize that in certain circumstances, the benefit of leasing may strongly outweigh that of buying, and vice versa.
For you to make the right decision, you should compare the economics of leasing vs. the economics of buying. You will also need to look at the factors that determine whether leasing or buying equipment is more sensible and beneficial to your business.
Comparing the Economies of Leasing vs. Buying
One of the main advantages of leasing equipment is that the cash required is less as compared to the amount of money you will need to purchase the same item. On the other hand, one of the main advantages of purchasing is that you will actually pay less in the end, as compared to what you would have paid if you decided to lease the equipment. Furthermore, if you purchase equipment, your equipment may depreciate in value and you may end up needing to replace it yet again as it won’t be the latest in technology.
Then the question arises, how do you reconcile these factors for you to make the best decision?
To determine whether to lease or buy equipment for your business, you can do a mathematical analysis of your business’ net cash flow that will result from buying and from leasing.A cash flow analysis gives you an estimate of the money that you will need to use today to cover the after-tax costs of each equipment acquisition alternative
. After carrying out the analysis, you’ll know which option is better.
Long-Term Effect of the Decision
Yes, it’s true that you should consider the short-term effect of leasing and of buying, such as the cash flow projections that would result in the first 12 months. However, it is also important and necessary that youconsider what would result from each alternative in the future
. As such before making a decision, consider how leasing or buying is going to affect your business in the future.
Factors to Consider
When determining whether to lease or buy equipment, here are some of the factors that should lead you into making a good decision:
Control of the Equipment
If you want total control of the equipment, then buying would be your better option. Leasing the equipment would mean that you are not at liberty to sell or modify the equipment even if you want to, because it does not belong to your business.
Consider and Work Out the Costs
When determining whether to lease or buy equipment for your business, you should do acost-benefit analysis
. Consider the net value of the equipment, which is simply its buying price minus all the ongoing liabilities including insurance and maintenance. Another factor to consider here is the cost of disposal; when the equipment in question becomes of age. What about the cost of replacement? If you need high-tech equipment such as computers, you should know that they become obsolete and lose their value fast. This means that the cost of disposing and replacing them would be high. This makes leasing such equipment less expensive and the better option as compared to buying. On the contrary, if you lease equipment you have no equity. When the lease is over, you do not have the option to sell, leaving you with any potential to make any money back. If you purchased the equipment you are able to recover some of the cost that you spent.
In addition, you need to factor outmonthly costs
. When leasing you usually make lower monthly payments that easier to budget for while buying outright means you need to pay it all upfront. Your initial cost is much higher and may prevent you from buying exactly what you want as you may settle for the less expensive model due to finances.
c. Tax Deductions
Unlike purchasing equipment, leasing equipment is almost always tax deductible. A small business can deduct the cost under operational expense under the 179 IRS Tax Code. When purchasing equipment, tax incentives under section 179 of the IRS Tax Code are larger for purchasing office equipment than for leasing said equipment. However, there are limitations. If your equipment does not fall under section 179 of the IRS Tax Code, you may be able to leverage a depreciation deduction for the equipment you have purchased for your small business.
Leasing is can be more flexible than buying as it offers more options in terms of what you can get for your money. You aren’t as restricted by high upfront costs or are worried that if the new equipment doesn’t work out, it is yours no matter what. However, leasing also locks you as you are committed to paying for the equipment for a predetermined amount of time. If you only need equipment for a short period of time, leasing may not be the best option as you are forced to keep it and are wasting funds to do so.
Buying can afford you less hassle. You don’t have to deal with agreements or contracts. You pay all expenses upfront and out of pocket. You decide exactly what type of equipment you need and are not limited to what is in stock versus what is on back-order.
When leasing you are not responsible for maintenance of the equipment for your small business. If something breaks or or has issues due to normal wear and tear, the leasing company is in charge of fixing the equipment. However, maintenance is up to the leasing company and so it may be difficult to get the equipment fixed. In addition, you may disagree on what the leasing company is responsible for and when they do proceed with repairs, you may be waiting a long time to have it fixed even though it needs immediate attention.
If you decide to purchase the equipment and it is in need of repair, you are responsible. This can be to your advantage as you don’t have to wait for a leasing company to approve the repair and you can have the situation dealt with immediately. Of course this also means that you are responsible for the cost of repair. Some repairs can end up costing more than you can afford and you end up stuck with a broken piece of equipment. Make sure you read the warranty on the item and extend the warranty if applicable and if the equipment is extremely costly.
If you decide to lease as opposed to buy equipment, you may be limited in what options are in stock. Your preferred choice may be unavailable due to back-order, being out of stock, or simply being discontinued. As such you may find yourself settling for a less than perfect equipment.
When determining whether you should buy or lease equipment for your small business, you need to consider tax deductions, potential resale value, flexibility, maintenance, out of pocket expense, and how soon will the equipment become outdated and how soon you will need to replace it. Determining these costs will help you decide whether leasing or buying is the best fit for your small business’ situation and needs.