Leasing vs. Buying Equipment: How to Make a Major Purchase Wisely

So your small business is growing and you’re finally ready to invest in that exciting new piece of equipment. You rock! But after a well-deserved round of high fives and champagne toasts, you might be feeling the sobering effects of that age-old dilemma — should I buy or lease?

Leasing equipment can be a great option for newer businesses short on cash, while buying may be a better choice in the long run for well-established businesses. But each business is unique, and making a smart investment decision is rarely black and white. Maintenance costs, flexibility, and tax deductions should be factored in.

With so many variables to consider, your head may be spinning well after the bubbly has worn off. Fear not — we are here to help you research before you make a major purchase and assess your options so you can make a well-informed decision.

What Factors Should be Considered When Determining Whether to Buy or Lease Major Equipment?

As a first step, it’s essential to educate yourself on the pros and cons of buying vs. leasing equipment. Let’s start with some of the advantages of buying equipment.

Buying Pros

1. Cheaper: If you have money in the bank and your cash flow forecast looks solid, buying equipment outright may be your best option, especially if you’re confident the item will have a long shelf life. Over time, buying may end up being cheaper than renting or leasing, depending on the item.

2. Easier: Buying can be easier because there are typically no confusing agreements or contracts to fill out. You simply find the equipment that best meets your needs and pay for it. Done!

3. More choice: Leasing might sound appealing until you realize you’re often limited by a vendor’s inventory. Buying allows you to shop around, compare prices, and purchase exactly what you need.

4. Greater control: Owning gives you total control, including swift repairs that meet your high-quality standards. You won’t have to wait for issues to be addressed or ask permission to make changes.

5. Builds equity: If your needs do change or the technology becomes obsolete, owning allows you to sell and potentially recover some of your cost.

6. Tax benefits: If you look at the tax benefits of leasing equipment vs. buying, buying equipment offers small businesses some fantastic incentives. If you finance a business purchase, you can typically deduct the interest as an expense. And with some business assets such as automobiles, you may be able to deduct the vehicle’s depreciation.

Even better, Section 179 of the IRS Tax Code allows businesses to deduct the full purchase price of qualifying equipment purchased or financed during the tax year. For most small businesses, the entire cost of equipment may be able to be written off on their Income Tax Return (up to $1,160,000). The U.S. government created this as an incentive for businesses to invest in their own assets by purchasing equipment.

As with all tax-related issues, consult an accountant or tax professional for guidance regarding your specific business.

Buying Cons

As with any major decision, it’s best to look at the potential cons, downsides, and minuses.

1. Greater up-front costs: In some cases, purchasing equipment may not be the best option if the initial cost of the investment is too high. High up-front costs may discourage you from buying exactly what you need, possibly causing you to settle for a less desirable option.

2. Cash crunch: Buying equipment also ties up cash you may need for other expenses such as that pay raise your star employee has been asking for. Even if you borrow money, you’ll likely be required to make a down payment of about 20 percent depending on the requirements. Low-interest loans have made financing equipment very attractive in the past, but lately, interest rates have been on the rise. So do the math on the long-term cost before assuming a financed purchase is your best bet.

3. Maintenance costs: Owning means you’re responsible for all maintenance, including the cost. And you could potentially be burdened with faulty equipment that you can’t return or sell. If you do decide to make a purchase, review the product warranty carefully to determine if — and for how long — it covers defects and repairs.

4. Risk of obsolescence: Today’s technology and software updates happen at lightning speed. And owning a piece of equipment might mean you’ll soon be stuck with yesterday’s technology. If the core value of your equipment is based on rapidly changing technology, you may be better off leasing.

Leasing Pros

1. Lower up-front cost: With a lease, you likely have easy, predictable payments spread over time, making it a great option for new businesses that may be tight on cash. Even if funds are available, you may want to hold off on large expenditures until you can predict your cash flow needs more accurately. Leasing means you’ll have more cash on hand for those inevitable new business surprise expenses.

2. Credit benefits: Leasing may be a good option if you’re looking to build your credit.

3. More flexible: Leasing allows you to adapt and try something new without the commitment of high up-front costs.

4. Tech upgrades: If your business requires regular tech updates to stay relevant, leasing reduces the risk of obsolescence. Be sure to check that your contract allows for technology upgrades if needed. Leasing also may put the responsibility of properly disposing old equipment on the vendor.

5. Easy tax deductions: Lease payments are typically considered tax deductible by the IRS.

6. No maintenance costs: With a lease, you typically don’t pay for maintenance. If something breaks, the leasing company should fix it.

Leasing Cons

1. High total cost: Depending on the length of the lease term, the cost of leasing equipment usually exceeds its purchase price. Some leasing options also require interest.

2. No equity: Since you don’t own the equipment, you can’t sell and recoup some of your investment.

3. Poor maintenance standards: Maintenance is typically controlled by the leasing company. Free maintenance sounds nice until you’re faced with poor quality standards and a slow turnaround time.

5. Limited choice: With a lease, the availability of products may be limited. Your favorite brand could be out of stock or not carried at all, limiting your choice to something that doesn’t meet your needs.

5. Unfavorable terms: Leaser beware! Some agreements may lock you into unfavorable terms. If your lease doesn’t include upgrades and your term hasn’t ended, you may be left with obsolete equipment.

How to Make a Major Purchase Wisely as a Small Business Owner

Now that you’re up to speed on the pros and cons of buying versus leasing, it’s time to apply these factors to your unique business needs. Start by asking yourself:

• How important is it to own the asset?
• How long will I use this equipment?
• Does my business depend on rapidly changing technology?
• How will buying or leasing impact my business tax-wise?

Ultimately, your decision may be driven by financial fundamentals like cash flow and financing options. Do you have the cash to purchase this equipment? If not, what is your ability to obtain financing?

Lenders don’t just look at your credit score; they also consider your available collateral and how long you’ve been in business. If you’re a new business and don’t have two to three years of financial records, banks may deny your credit request depending on your specific situation.

To assess your financing options, follow these steps:

1. Pull your credit details from FICO, Dun & Bradstreet, Experian, Equifax, and personal credit.
2. Obtain prequalification quotes from at least three lease companies.
3. Hire a bookkeeping service to determine your options for buying or leasing new equipment, based on the quotes.

If your equipment requirements are modest and you have cash on hand, purchasing equipment outright may be your best bet. However, if you’re facing a large investment, leasing is often the better choice. Cash flow is the lifeblood of your business. And although it’s important to weigh all factors carefully, it’s risky to tie up large sums of cash when you could use that money to grow your business, especially in uncertain economic times.

Different leasing companies have different credit score requirements. Some may not require a down payment depending on their specific terms. So you have a decent chance of finding a lender who can work with you.

If you decide to go with a lease, it’s important to understand the typical tax implications of the two types — an operating lease and a capital lease.

An operating lease is usually a short-term lease. With an operating lease, the equipment is returned at the end of the lease. So for tax purposes, the equipment is typically considered a monthly operating expense rather than a depreciable asset.

A capital lease is a longer-term lease. With a capital lease, you often end up owning the equipment at the end of the lease or have the option to buy it. The equipment is then considered an asset on your balance sheet, and you can get the benefits of ownership, such as tax depreciation.

Whether you go with an operating lease or a capital lease, find out if the leased equipment must be insured. Also, before signing on the dotted line, be sure to clarify if the leasing company will incur an early termination penalty charge on you.

Doing a Lease vs. Buy Equipment Analysis

A lease vs. buy analysis is a process wherein you evaluate the cost of an asset under two circumstances. You complete a financial comparison of buying an asset outright versus leasing it, and determine which would hold the maximum value for your small business.

Some common methods to complete a lease vs. buy analysis include:

• Online calculators
• Spreadsheets
• Financial analysis software

If you’re on the fence about whether to lease or buy, doing an analysis could, at the very least, help you determine which is the best financial decision pound for pound.

Common Examples of Leasing vs. Buying for Your Small Business

Some of the most common piece of equipment that small business owners will have to decide whether to buy or lease are:

• Computer equipment
• Printers and digital copiers
• Catering equipment
• Construction machinery
• Office equipment
• Manufacturing equipment
• Restaurant and kitchen equipment

Why is May be Time to Look at Your Business Insurance

Regardless of your ultimate decision to buy or lease, a major purchase is a positive sign your business is growing. If so, it’s a good idea to consider looking at your current business insurance.

Here at Simply Business, we’re an online insurance platform that specializes in helping small businesses to find affordable insurance coverage — all in just a few minutes. It’s a small investment for the protection we can provide when and if the unexpected happens.

The Simply Business® team works with leading national carriers that specialize in providing coverage for small businesses like yours. And as a result, we often can offer multiple quote options for similar coverage.

So whether you need general liability, workers’ comp, or another type of business insurance, let us help. Use our free quote comparison tool to get policy options from the nation’s top insurers.

Got questions? We can help there, too. Our licensed insurance pros can get you the answers you’re looking for and get you covered — often on the same-day call. You can reach them at 844-654-7272, Monday-Friday, 8 a.m.-8 p.m. (ET).

If you see a policy option you like, you can click to buy it. It really is that simple!