Leasing vs Buying – What’s Best?
You might need assets such as computers, networking equipment, machinery, or even vehicles – but there are so many things you need to consider before choosing a financing option.
What would be better for your business? Leasing vs buying? Well, it all depends on what’s important to you and what will make more sense for your business. With leasing there is more flexibility, fewer-to-no upfront costs, and a range of other benefits that might sway your decision. Leasing is also growing in popularity – between 2012 and June of 2016, lease contracts increased by 49% among millennials.
Here’s a look at the benefits and downsides of both leasing and buying equipment:
The Benefits of Leasing
Leasing offers you more flexibility. If you have equipment that needs constant updating, leasing makes it easier to acquire updated technology. Certain equipment will eventually become obsolete, especially with the rapid evolution of technology these days. As a business, you’ll need the latest equipment to stay relevant and at the top of your game. After your lease expires, you can lease whatever equipment is newer and faster. Some leases also provide you with the opportunity to upgrade or refresh so you can stay up to date. According to a 2005 Equipment Leasing Association survey, 5% of respondents said the ability to have the latest equipment was leasing’s number one perceived benefit.
It makes budgeting easier. Since there are fewer upfront costs, and you have a fixed monthly expense, this will allow your business to budget more effectively. Since there isn’t a large lump sum to pay, it will be easier to manage cash flow over time – and on expiry replacement will not require a lump of capital but will probably be the same monthly expense or less. Speaking of cash flow, with an inclusive contract you’ll have more money in the bank as you won’t have to worry about paying for maintenance or fixing broken equipment due to normal wear and tear - fortunately, the leasing company may well be responsible for that.
Tax advantages. Leasing can have major tax advantages. Under the 179 IRS Tax Code, leasing is often 100% tax deductible as an operational expense. Put simply, when leasing equipment, you can treat the lease payments as an expense rather than depreciating your equipment as a capital cost. Assets that depreciate in value can be written off more quickly when it is leased.
The Cons of Leasing
You pay higher costs over time. In the long run, leasing might cost you more money. For example, a €4,000 machine would cost a total of €4,360 if leased for three years at €121 per month (assuming an interest rate of 6%) but only €4,000 if purchased upfront.
It should be noted, however, that this is a double-edged sword, as it were, because being able to purchase it outright relies on having the capital ready and available as it immediately becomes tied up in an asset instantly worth less than what you just paid for it. See the cons listed below [insert anchor link on HubSpot].
No equity. Since you don’t own the equipment, you won’t have any equity built up. This means that you can’t sell the equipment once you are done with it. However it is the lessor’s responsibility to dispose of it.
The contract to pay. With a lease, you’re required to pay even if you stop using or no longer require the equipment.
The Benefits of Buying
It’s generally easier. Although leasing gives you so much more flexibility, buying equipment is easier as it requires less paperwork. You just decide what you need and pay for it. There are also no agreements and contracts to deal with. This doesn’t necessarily mean that leasing is complicated. Using lease management service companies can take the pain out of leasing plans as they do most of the work for you.
You own the equipment. If you own the equipment, you can make any alterations that are necessary. You can also sell it when you want to and recover some of the outlay costs. This also means that maintenance and disposal will be in your hands, so make sure you that don’t mind the responsibilities of ownership.
Tax incentives. Leasing isn’t the only option with tax incentives. Section 179 of the IRS Tax Code allows you to deduct the full cost of newly purchased assets in the first year. Most leases can only be deducted month by month.
The Cons of Buying
The large upfront cost. Not everyone has a large lump sum of cash lying around, so it may be difficult to pay for the assets you need all at once. Instead of spending it all in one go, on the asset, that money could be used for marketing, advertising, and any other things that could help grow your business. The higher initial cost may also keep you from getting the equipment you really need and make you settle for the lower-cost option.
Stuck with outdated technology. Unlike a lease where you have the equipment for a fixed and sometimes shorter amount of time, buying the equipment means you are stuck with it. Since computer technology becomes outdated quickly, you’ll either have to sell it, donate it, or recycle it and buy new equipment if you want to keep up with the times.
Responsible for all maintenance. Since you’re the owner of the equipment, you’re responsible for everything that happens to it. This includes fixing wear and tear and ethically and legally disposing of it when you no longer need it. You can’t always return or sell the equipment, so you may need to scrap it or recycle it.
So, Which Is Best When It Comes To Leasing Or Buying Assets?
As the above pointers illustrate, it’s largely down to your own company’s circumstance. Not only in the moment - do we have the capital? Is the price fair? - but also when forecasting three, five, fifteen years down the line - will the asset be outdated in a matter of years and too expensive to replace with a new purchase? Will we be easily able to offload the asset to raise capital if needed? Is it easy to dispose of?
Every company’s requirements are different, but if leasing sounds like the better option for you, check out our guide to learn more.