Should You Buy or Lease Your Equipment?

Small businesses need various types of equipment to function, whether it’s heavy machinery, farm tools, X-ray machines, phones, computers, or office furniture. The decision lies in whether to lease or purchase this equipment. Purchasing equipment can be costly, but it can also serve as a valuable asset for your business. Leasing offers benefits like possibly lower initial costs, but it also has its disadvantages.

So, which choice is best for your business?

Let's explore the advantages and disadvantages of leasing versus purchasing, along with other potential options.

What is the difference between leasing and buying equipment?

Buying and leasing are two different approaches to equipment financing. The main difference lies in who owns the equipment.

Leasing: Opting to lease equipment means you won't own it. Instead, you'll be renting it from a leasing company. Typically, a lease can range from a few months to several years. During this time, you'll make lease payments, with the terms and costs set by the leasing company. Once the lease concludes, you might have the choice to purchase the equipment, extend the lease, or return it.

Buying: When you purchase equipment, you become the owner. Due to the high cost of business equipment, many small business owners choose to obtain an equipment loan. Depending on the lender, a down payment may be required to secure such a loan, but there are other financing options available. Although the details of these business loans vary by lender, equipment loans typically have terms ranging from one to 10 years. Once the loan is fully repaid, you retain ownership of the equipment. An equipment loan can be utilized for both new and pre-owned equipment.

What are the benefits of leasing equipment vs. buying?

Leasing equipment offers a few advantages for businesses.

Upfront costs: Leasing usually demands less initial capital than purchasing. When acquiring equipment, lenders might require a down payment, and buying it outright might not be feasible. In contrast, leasing often doesn't need any upfront payment and can assist in preserving your cash flow.

Flexibility: Leasing equipment provides the opportunity to switch to newer, more advanced technology at the conclusion of the lease term. In contrast, purchasing equipment means you retain the same technology until you choose to sell or upgrade it.

Maintenance and repairs: Lease agreements may offer maintenance and repair services, potentially saving you time and money. If you own the equipment, those expenses might be your responsibility.

When to consider leasing equipment

Before choosing to lease business equipment, it's important to evaluate your specific business circumstances to determine if it's the best choice. Here are some scenarios where leasing might be beneficial:

• No capital for a down payment. If you lack the funds to buy equipment or make a down payment on an equipment loan, leasing might be a viable option to obtain the equipment you require.

  
  

• The equipment quickly becomes obsolete. Certain equipment, such as technology, can rapidly become outdated when new devices are released. To keep your business at the forefront, leasing might offer greater flexibility for upgrades.

  
  

• Your business is growing. If your business is expanding and you need to obtain more advanced or larger equipment, leasing could assist you in acquiring the necessary equipment without compromising the cash flow required for growth.

  
  

When to consider buying equipment

When thinking about buying equipment, consider your business’s needs and resources. Here are some times when buying may be a good option:

• Sufficient capital. If you have enough working capital to buy equipment or make a down payment on an equipment loan without affecting cash flow or compromising other business requirements, then purchasing equipment might be suitable for you.

  
  

• The equipment will last. Certain equipment has a very extended lifespan and is unlikely to become outdated in the near future. Items such as heavy machinery or tractors might be more suitable for purchase, as they are expected to remain useful even after the loan is settled.

  
  

• You want to grow your business’s assets. One major advantage of purchasing equipment is ownership. You won't face any limitations or restrictions that might accompany a lease. Additionally, the equipment will serve as a long-term asset for your business.

  
  

Pros and cons of leasing equipment

Pros

• Cost. Lower initial costs and steady monthly payments can help you better manage your cash flow.

• Tax benefits. Lease payments may be tax deductible as a business expense.

• New equipment. Leases with fixed terms can make it easier to upgrade to the newest technology.

  
  

Cons

• No ownership. Not owning equipment can be a disadvantage. You’re likely putting a good amount of money towards a lease and the equipment isn’t a business asset.

• Total cost. While leases are often cheaper in the beginning, you may end up paying more than the cost of the equipment over the life of the lease.

• Contractual obligations. Depending on the lease agreement, the use of the equipment may be subject to restrictions. You may also run into penalties and fees for things such as early termination.

Pros and cons of purchasing equipment

Pros

• Ownership. Owning a piece of equipment can be a big plus for your business as it can become a valuable asset.

• Tax breaks. You may be able to take advantage of certain tax benefits like depreciation deductions or section 179 deductions.

• Residual value. Since you own the equipment, you can decide to sell it when it’s no longer needed, or it could potentially be used as collateral.

Cons

• Initial cost. There are a lot of costs associated with equipment purchases. The equipment itself may be expensive or you may need a down payment for an equipment loan. Plus, if you do opt for a loan you’ll need to think about things like interest rates and the overall cost of borrowing.

• Maintenance cost. The cost of fixing and maintaining equipment will fall on your shoulders as the owner if not covered by warranty.

• Outdated equipment. You may get stuck with equipment that’s fallen into obsolescence.

• Depreciation. Used equipment can lose value over time, this can impact its resale value and the equipment’s value as a business asset.