When investing in business equipment, you often choose to purchase or lease it.
Each option offers specific benefits and drawbacks. Your financials, goals, needs, and the equipment’s actual purpose each play a role in determining whether to buy or lease.
This article compares the pros and cons of purchasing and leasing equipment to help you decide on the best acquisition method for your company.
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Purchasing Equipment
Purchasing equipment involves paying a seller to take legal ownership of the equipment for your company.
You may need to secure financing, such as a small business loan, to purchase the equipment. You could save up to buy, but this could drain your cash reserves or cause you to miss investment opportunities elsewhere.
Pros of Purchasing Equipment
Here are some advantages to purchasing equipment:
- Ownership: Owning the equipment gives you more control and decision-making power. You aren’t restricted in its use like you might be with a lease contract. Plus, owned equipment counts toward business assets.
- Potential tax benefits: You could depreciate owned equipment to claim depreciation tax benefits. Smaller asset purchases could qualify for full write-offs in the year purchased.
- Long-term savings: Depending on the equipment’s useful life and the cost of any financing you use to buy it, owning the equipment could ultimately save money over the long term.
Cons of Purchasing Equipment
Keep these drawbacks in mind when deciding whether to purchase your equipment:
- Higher upfront costs: Purchasing the equipment requires you to front funds for the full price. You may need to get financing to cover the purchase.
- Maintenance and repairs: You must handle maintenance and repairs, which can cost you time and money and negatively impact your business if the equipment is out of commission for too long.
- Risk of obsolescence: The equipment may become obsolete before its useful life ends, meaning you may get no more value out of it or be able to sell it for a decent price. For example, if you purchase computer equipment that becomes obsolete, it may slow things down and it may be hard to recoup the original cost.
Leasing Equipment
Leasing equipment involves paying for the right to use equipment for a specific duration defined in the lease contract, rather than taking outright ownership.
The lease contract may specify other things, such as usage restrictions or cancellation terms.
Pros of Leasing Equipment
Leasing equipment can offer the following advantages over purchasing:
- Lower upfront costs: Leases cost less upfront. You may owe several fees, and some lessors may require a down payment, but these will often be far less than paying for equipment ownership.
- Hands-off repairs and maintenance: Some lessors may offer to cover repairs and maintenance in your lease contract. This saves you time on the repair and money on the materials and expertise needed.
- Easy upgrades: Leasing lets you swap out your equipment for the latest version or receive upgrades when the lease ends. This helps you access the latest version easily to keep business going smoothly.
Cons of Leasing Equipment
Leasing equipment may come with some drawbacks compared to purchasing it:
- Lack of ownership: Leasing means you don’t own the equipment. The lease may restrict its usage. You also must return the equipment if the lease ends, meaning you’ve paid significant money without gaining any equity in the asset.
- Higher long-term costs: Leases may cost you more in the long run since you will always have a lease payment for as long as you lease. On the other hand, it’s possible to be payment-free if you own the equipment once you pay off any financing.
- Fewer tax benefits: Lease payments may be tax deductible, but the deduction size may not be as significant as depreciating the asset.
The Verdict: Should You Purchase or Lease Equipment?
Purchasing the equipment gives you full ownership and control over the asset, offers larger potential tax benefits, and potentially saves money in the long run. However, you must pay to acquire and maintain the equipment which could go obsolete.
Leasing saves you money up front and makes maintenance and upgrades easier. However, you don’t build equity in the asset and may ultimately pay more in the long term.
Companies in more “traditional” industries with stable cash flows, such as construction, could benefit most from purchasing. Meanwhile, industries that advance rapidly, such as tech startups, may prefer to lease.
Ultimately, the best choice depends on your financials and needs. Careful consideration and research can help you select the path that offers the most for your business.
