Whether you're starting a new business or growing an existing one, you probably need equipment to get the job done. For many, the inclination is simply to buy new equipment when needed, but leasing may be a better alternative. Understanding the pros and cons of leasing versus buying can help you determine which is best for your cash flow and your bottom line.
In many ways, leasing is just another form of financing. Both will depend on credit worthiness and both will include interest costs.
Leasing offers two chief advantages over buying. First, most leases will finance 100 percent of the purchase, so there's no need for a down payment and your capital remains available for other operational needs. Second, 100 percent of the lease cost is tax deductible. When you purchase business equipment with financing, only the interest is deductible.
Another, lesser, advantage is that the company that owns the equipment is responsible for its maintenance and disposal. Being free from maintenance issues allows the lessee to focus on its core business and eliminates headaches of selling or properly (i.e., in accordance with Environmental Protection Agency rules) disposing of equipment when it's outlived its usefulness.
The major disadvantages to leasing are that at the completion of a lease, you have nothing to show for it--unless you have a buyout option; and internal interest rates (that are already figured into the lease cost) are typically more expensive.
Buying, on the other hand, means the equipment is yours once you've paid for it. If the equipment is something you'll likely be using 20 years later, that's a significant advantage. Also, Section 179 of the Internal Revenue Code allows you to deduct the cost of some newly purchased assets in the first year. Even if the equipment doesn't qualify for Section 179 deductions (real estate or retail inventory, for example), you can still deduct depreciation.
The primary disadvantages to buying are availability of capital and equipment obsolescence. Often, traditional financing requires a down payment of 20 percent. That may put the cost out of reach for some businesses, cause too much strain on cash flow or tie up credit lines that could be used for other opportunities.
Buying also doesn't make sense for equipment that will soon be outdated. This is particularly true for high-tech equipment, such as computers and copiers which will have little if any resale value by the time they are paid for. Leasing such items provides a built-in schedule for updating to the latest technology.
When deciding whether to buy or lease equipment, it's important to look at the transaction from all angles: length of financing, tax savings, other capital needs, equipment obsolescence and total costs (including employee time). Above all, look beyond the monthly payment to be sure your business can afford the overall investment.
By Terry Collins, La Crosse Attorney. For more information on buying vs. leasing, contact him at 6080-784-5678.