leasing vs buying equipment

Leasing vs. Buying Equipment for Business

When you are starting or expanding a business, one of the biggest decisions you need to make is whether you will be buying vs. leasing equipment. Now, there is no correct answer to this question, as your choice will depend on your situation. Leasing might be the practical option if you intend to use the equipment only for the short term, while purchasing will allow you to own the machine for the rest of its useful life.

If you’re on the fence about whether you should lease or buy, we list the pros and cons of each below to help you decide.

Equipment Leasing vs. Buying: What’s the Difference?

Leasing equipment is equivalent to renting it out for a specific period. There’s no initial investment involved, and you only pay for the use of the machine for the duration of the lease. If you have limited access to capital or would rather invest your money in other growth areas, equipment leasing is a practical option. This is also true if you don’t foresee yourself needing the machine until its useful life is over or if it can be easily upgraded down the line. An example of equipment that you might want to lease is IT hardware.

On the other hand, if you have a more established business with fixed operational needs, buying the machines outright could save you more in the long run. If you are considering equipment that has a long useful life and see yourself still needing it for the next 10 years, consider buying instead of leasing. The capital investment will be high, but its usage and long-term value will more than make up for the initial spending. Examples of machines that you might want to purchase instead of lease are farm machines and construction equipment.

Pros and Cons of Leasing Equipment

Equipment leasing is great for businesses with limited capital and ever-evolving needs.  It also allows you to preserve your working capital for other investments. Here are the pros and cons of choosing this option.

Pros of Equipment Leasing

  • Low to no upfront cost: Some lenders may or may not require you to place a downpayment on your machine. This gives you more liquidity to focus on other aspects of your business.
  • Flexible payment terms: Depending on your provider, you can negotiate for extended payment terms (longer than regular loan agencies offer) to lower your monthly costs.
  • Tax deductions: Lease payments can be recorded as a business expense on your tax filing, thereby lowering the lease’s net cost.
  • Easy to upgrade: If you need to upgrade your machines to make way for a new service or product, you can easily do so with a leasing plan. You have the option to take a higher-end machine after your lease contract expires.

Cons of Equipment Leasing

  • You don’t own the equipment: Leasing means you don’t have equity in the machine unless you decide to eventually buy it when your lease expires.
  • You are obligated to complete the entire lease period: Whether or not you use the equipment until your lease expires, you are bound by contract to keep paying your monthly fees. You can terminate the agreement early, but be ready to pay for hefty pre-termination fees.
  • You might have to return the equipment: If you terminate your lease agreement or go out of business, you might have to return the leased equipment.
  • Higher overall cost: In the long run, leasing equipment will turn out to be more expensive than buying it outright because of the interest rate and other fees tacked on to the lease.

Pros and Cons of Buying Equipment

Buying equipment is an investment into your business’ future, particularly if the asset continues to be useful and lasts longer than 10 years. However, the high initial cost to acquire it might deter small businesses and companies with limited capital from moving forward.

Here are the pros and cons and buying equipment to help you decide:

Pros of Equipment Buying

  • You own the machine: This is especially advantageous if you’re buying a machine that isn’t likely to be obsolete in the next decade or so.
  • Tax breaks: According to the Internal Revenue Code, the cost of newly purchased assets is fully deductible in the first year. You can also gain additional savings from depreciation deductions.
  • It’s less expensive in the long run: Since you are buying the equipment upfront, you will be paying less because you won’t have interest on top of the purchase as you would with a lease.

Cons of Equipment Buying

  • High initial cost: Machines are expensive so businesses that have little capital might not go for this option at the outset.
  • Declining value: The value of your equipment diminishes over time as you continue to use it. This means that though you might find a buyer to purchase your equipment later on, the resale price will be much lower than what you paid when it was brand new.
  • Getting stuck with obsolete machines: If your equipment becomes obsolete, what should you do with it? As mentioned, equipment that’s well past its prime will have very little resale value, so you can either sell them off as junk or throw them away.

Should I Lease or Buy?

There are several factors that should go into your decision whether you should lease or buy equipment:

  • How long will the equipment be used?
  • What’s the initial cost?
  • What are the monthly lease/payment terms?
  • Are there any tax benefits for leasing/buying?
  • Will you need to upgrade in the near future?
  • What’s the residual (resale) value of the equipment at the end of the lease/purchase?
  • Are you comfortable with the risks associated with leasing/buying (e.g. returning equipment, obsolete machines)?

In most cases, it is more advantageous to buy equipment rather than lease it. This is especially true if you plan to use the equipment for an extended period of time and the initial cost is reasonable. However, there are some cases where leasing might be a better option, so it’s important to weigh all the factors involved in each decision.

Get the Support You Need To Grow Your Business From Charter Capital

Whether you need support for leasing or buying your equipment, you can count on Charter Capital to provide professional and reliable advice on your equipment financing options. We have been helping small and medium-sized business owners and stakeholders to achieve more with a smart approach to financing for more than 40 years. Most of our customers have been in business for at least three years and log annual revenues of $750,000 to $25 million.

If you want to get the lowest rates and longest-possible repayment terms for your equipment requirements, contact the Charter Capital team today. We can help you with insights on whether leasing or buying will be beneficial for you and get a fair deal from any of the over 20 trusted lenders from our network.