Keeping your business operating smoothly requires proper equipment. Perhaps you're weighing the cost of renting delivery vans or considering whether to purchase a new high-tech manufacturing system. But how do you determine whether you should buy or lease your equipment? Decisions like that depend on a mix of strategic, financial, and industry-specific factors.
Not sure whether to lease or buy equipment? Here are a few key points business growth consultants advise you to consider.
When you lease equipment, you typically avoid large upfront costs. Instead, you pay smaller monthly fees that allow you to preserve cash flow for other business needs. This can be a critical advantage if you're trying to scale operations or manage seasonal revenue swings.
Buying equipment, however, requires a significant initial investment. If you purchase outright, you're immediately hit with the entire cost. Even financing the purchase commits you to a long-term liability. On the plus side, once you've paid in full, it's yours to use without any additional recurring payments.
When evaluating which route to take, consider the importance of preserving working capital to your current business goals. If liquidity is a priority, leasing might be the smarter path.
Another key factor is how quickly the equipment in your industry becomes outdated. If you're in a fast-moving industry (ex., tech, healthcare, or manufacturing), your machines and tools may become obsolete in just a few years.
Leasing allows you to upgrade regularly without needing to dispose of aging equipment. It simplifies your refresh cycle and ensures you're always using the latest technology. On the other hand, owning equipment that becomes outdated can leave you stuck with assets that no longer meet your business needs.
Purchasing may offer better long-term value if your equipment has a long, stable lifespan, such as commercial ovens or industrial compressors. You'll benefit from depreciation and potential resale value, making ownership more financially sound over time.
Leasing and buying also carry different tax implications. Lease payments are usually fully deductible as business expenses, which can simplify your bookkeeping and offer consistent write-offs.
Purchasing allows for depreciation and potential Section 179 expensing, which means you can deduct a large portion of the purchase cost in the first year. This can be particularly beneficial if your business is having a strong tax year and needs deductions to offset income.
It's a good idea to work closely with your financial advisor or accounting firm to model the tax outcomes of both options. A cash-based business might benefit more from leases. In contrast, an accrual-based business with predictable profits may lean toward purchasing.
Leasing offers a shorter-term commitment with built-in flexibility. If your business is expanding rapidly or navigating unpredictable demand, leases allow you to scale your equipment needs without being tied to long-term ownership. You can adapt quickly as your operational needs evolve.
Ownership brings long-term control, but it also locks you into specific assets. If your business pivots or you outgrow your equipment, selling or repurposing it can create additional logistical and financial burdens.
Consider the stability of your current equipment needs. If they're likely to shift in the next few years, leasing can help you stay responsive without overcommitting.
Your decision may also depend on your business's access to credit. Leasing often requires less stringent credit checks, making it a suitable option if you're still building business credit or don't want to utilize existing lines of credit.
Buying equipment, especially through a loan, can affect your credit capacity. That might not be a problem if you have a strong credit profile and no near-term borrowing needs. If you anticipate needing financing for other projects, leasing may keep your options open.
Evaluate your current credit position and how much of your borrowing power you want to dedicate to equipment acquisition. This will help you determine which option aligns best with your financial roadmap.
Buying gives you complete control over the asset once you've paid it off. You can continue using it without recurring payments or choose to sell it and recover some of your investment. This can make ownership appealing for equipment with lasting utility.
Leasing, on the other hand, means you return the equipment at the end of the term, or you may have the option to buy it at a residual value. This can be a drawback if you have to return it and then pay again for a replacement or a new lease for equipment that still functions well and meets your needs.
Consider how likely you are to continue needing the equipment after your lease ends. If long-term use is probable, ownership might offer better value.
To help you decide between leasing and buying, ask yourself:
Balancing these questions against your business strategy will help clarify the right move when it comes time to complete the necessary transaction.
Whether you lease or buy, the key is aligning your decision with your business goals and financial structure. Both options can be viable under different circumstances, and there's no one-size-fits-all answer.
Take the time to consult your financial advisor and consider how this decision aligns with your broader operational plan. The right choice will help you stay efficient, competitive, and financially healthy for the long haul.