For businesses that depend on large, expensive equipment to be competitive in their industries, there’s often a question regarding whether it’s better to buy or lease equipment. Unfortunately, many business owners don’t understand the financial impact of buying and leasing and don’t make very savvy choices. As an accountant or financial advisor for such clients, it’s important that you steer them in the right direction – or at least lay out the facts.
Advantages of Buying
Companies that are financially able to buy their own equipment are afforded a number of benefits. Here are a few of those:
- Control. Practically speaking, the ultimate benefit of buying is that the business gets total control of the equipment they use. They can use it how, when, and where they want, and this versatility is desirable for many.
- Resale value. Along with that control comes the ability to sell equipment. In some cases, when looking at highly reputable brands, that resale value can allow companies to recoup most of their upfront expenses. According to Dragon Products, LTD, which now has a used equipment yard, “Customers might be looking to liquidate idle equipment and we can meet that need and potentially offer them a better financial result.”
- Deductions. As you know, depreciation, repairs, insurance, taxes, and interest are all deductible. This takes out much of the sting of a potentially large down payment and levels the playing field when it comes to leasing.
Disadvantages of Buying
There are also plenty of risks that come along with buying, though. Consider the following:
- High upfront cost. When businesses buy, they’re obviously forced to pay a down payment. For example, paying a $30,000 down payment for a $200,000 piece of machinery – in addition to monthly payments of $1,000 – could seriously impact cash flow for years to come.
- Old equipment. When businesses buy equipment, they may be stuck with it for a number of years. This becomes a disadvantage when that technology becomes obsolete and new equipment is developed.
Advantages of Leasing
Now, let’s review some of the advantages of leasing major equipment:
- Low capital requirements. The primary reason businesses lease equipment, as opposed to purchase, is for the low upfront capital requirement. For businesses with tight budgets and very little cash in the bank, leasing is often the only option.
- Easy to upgrade. Because businesses don’t technically own the equipment they lease, they’re allowed to address the issue of obsolescence head on. Ultimately, the lessor has to manage the burden of out-of-date technology after the lease expires.
- Tax deductible. Lease payments may qualify a business for deductions on their tax return, which essentially reduces the net cost of the lease.
Disadvantages of Leasing
Finally, let’s review some of the disadvantages of leasing major equipment:
- No equity. When a business leases equipment, they obviously don’t own it. This lack of ownership also means a lack of equity, ultimately devaluing the business.
- No way out. While we’ve discussed the fact that buying equipment comes with the disadvantage of possibly getting stuck with obsolete technology, the ability to sell always exists. When businesses lease, they’re required to pay for the entire lease term (unless there’s a built-in termination clause). This is unfortunate when a business no longer needs the equipment.
Making the Smart Decision
While the decision ultimately comes down to the business, you can help your clients make calculated decisions that will benefit them in the future. Be sure to talk through each of the advantages and disadvantages for both buying and leasing so that they can choose how to proceed. In some cases buying makes the most sense, whereas other cash-conscious businesses may need to lease.