Business owners must make many decisions about how their businesses and finances are managed. One of the most common decisions many business owners must make is whether they should lease or buy the equipment required to operate. To make that decision, business owners must weigh the pros and cons of each option.
Here is some helpful information about leasing versus buying equipment, as well as the pros and cons of each option.
Leasing equipment can preserve capital and provide flexibility, but there are definite advantages and disadvantages, such as the following:
Advantages of Leasing:
- Less Upfront Expense: The main advantage, or pro, of leasing is that you have minimal upfront expense. Often, a down payment is not required, and cash flow is preserved.
- Tax Deductible: Lease payments can often be deducted as a business expense when you file your taxes.
- Flexibility: Lease terms are generally more flexible than purchase terms. There is also generally greater flexibility in your options to upgrade equipment.
Disadvantages of Leasing:
- Higher Total Cost: It’s true that leasing will reduce your initial expenses, but overall, the total cost will be higher than purchasing.
- Ownership: When you lease, you do not own the equipment, and therefore do not build equity in it.
- Obligation: Even if you decide that the equipment is no longer needed, you will still be obligated to continue lease payments for the duration of the terms set. Should you choose to terminate the agreement, you likely will be subject to termination fees.
Buying equipment can offer tax breaks and opportunity to build equity, but it may require a significantly higher amount of upfront costs. The pros and cons of buying equipment may include:
Advantages of Buying:
- Ownership: Perhaps the biggest advantage to buying equipment versus leasing is ownership. When you own the property, you build equity.
- Tax Incentives: Section 179 of Internal Revenue Code allows business owners to deduct the full cost of some equipment, and a certain value of others. These tax incentives can help business owners reduce total cost and roll that money back into their business.
- Selling Opportunity: If you determine that the equipment is no longer needed, as an owner, you have the opportunity to sell the equipment and put that money back into your business, rather than being obligated to continue payments on leased equipment.
- Options: Most companies have limited stock that is available for lease. When you buy equipment outright, you will likely have more options as to models and features.
Disadvantages of Buying:
- Initial Expense: Buying equipment rather than leasing requires a higher initial expense. Even if you finance the equipment, you will often be required to pay a significant down payment.
- Aging Technology: As technology changes, you may find that the equipment you bought just a few years earlier is quickly outdated. This can make it difficult to sell the equipment or upgrade without additional costs.
- Maintenance: When you buy equipment, you become responsible for all maintenance and repairs unless you purchase additional warranties or service plans. This can increase the costs significantly upfront, or over the life of the equipment.
How to Make the Best Decision for Your Business
Ultimately, the decision of leasing versus buying equipment will depend on the details, needs, and financial goals of your business. If you need help determining which option is best for you, contact Daic Law to speak with our corporate law attorney who can offer guidance on the best options to protect your business, assets, and legal rights.