One of the biggest concerns you’ll be forced to tackle when setting up your business, or expanding, is whether to buy or to lease the equipment you need to operate.
Quick takeaways if you’re in a hurry:
- Deciding between Leasing and Buying equipment isn’t simple and straightforward, and depends strongly on the type of business you’re running, how quickly the industry is evolving, how expensive the equipment is, and how much startup capital you’re working with
- Buying equipment means holding legal title to it, so you can use it at a moment’s notice, and modify or sell it as needed. If you’re going to use the equipment frequently and for a long time, it could be much more cost-effective than leasing
- Leasing equipment is less expensive in the short term, and is much easier if you don’t have enough capital to purchase equipment. It also means you won’t need to worry about the costs of wear and general maintenance.
Read on: Lease equipment, or buy it? Here are your options[Estimated reading time: 6 minutes]
Choosing the best option when acquiring the equipment you need to do business can feel daunting, but it’s doable if you and your financial advisors analyse and determine what your business’ needs are, and how well one of these two options can help you satisfy them.
Figuring out what your business’ needs are
Before you even consider the question of whether buying or leasing is the wiser choice for you, you’ll need to answer a few questions about your specific situation. These should include, but aren’t limited to:
- How much startup capital do you have?
- How much interest would you need to pay on a loan used to purchase equipment?
- Would existing capital be best spent on equipment, or something else?
- How often do you expect that you’ll need to replace or update your equipment?
- How well does the equipment retain its value?
Knowing the answers to these and related questions will help you paint a much clearer picture in regard to which advantages are better suited to your particular situation.
Purchasing equipment is a great option for businesses who expect to use the same equipment frequently, and for a long time. Most simply, if the cost of leasing the equipment over the period that you intend to use it exceeds the cost of the equipment, it’s probably worth buying.
Unfortunately, it’s not always that clear, because you’ll also need to consider several other factors. If you purchase an item for $10,000 instead of leasing it for $4,000 over 2 years before re-selling it for $7,000, you’ll have made a better decision than if you had leased it. Then again, if you financed the purchase with a loan, the interest paid on that loan may more than offset the money saved through this clever tactic.
In general, good indications that buying is a good choice for you are:
- You intend to use the equipment for a long time
- You have the capital needed to purchase items without sacrificing other important purchases
- You want or need to permanently modify the equipment to suit your needs.
The most obvious reason to lease is that you can’t afford to buy. If you don’t have the collateral needed for a loan, you may simply be forced to lease. However, there are some very good reasons to lease, even if you could technically afford to purchase.
Leasing keeps more of your startup capital liquid, so you can spend it on other important things like wages, rent, insurance, and marketing. Additionally, it means you won’t need to worry about repairing or updating your equipment. If old equipment becomes obsolete, you can simply lease a newer model without being forced to make a big new investment. This is especially important if the piece of equipment is due for a major upgrade that will give your business the competitive edge.
Besides that, you may only need specific equipment for a few weeks every year, or a few days per month. In these cases, you wouldn’t need to pay for a long-term lease, and it would take a very long time for the cost of leasing to exceed the value of the item. If it isn’t carefully managed, though, this freedom can become expensive in the long-term. Signs that leasing is the best choice for you right now are:
- You don’t have the startup capital to invest in major equipment purchases
- You don’t intend to use the equipment all the time
- You don’t want the responsibility of maintaining and updating your equipment.
Both the cost of buying and leasing may be lower than you expect, because you’ll be able to claim tax breaks both for the depreciation of assets that you purchase, and for the cost of lease payments. In the case of purchasing, you won’t be able to claim tax breaks on the initial cost of the equipment, but you will be able to recover some of your investment over time based on the depreciation of the item. If you’re leasing, you’ll be able to claim a tax deduction for the up to 100% of the cost of the lease payments.
There isn’t one right solution to the “purchase or lease” dilemma for all businesses. The question of whether to lease or buy will vary depending on the kinds of equipment you are looking at investing in. What is important, is to take into account all of the costs, hidden or otherwise, of whichever option you choose and balancing it with the return. With careful planning, you can maximise the reward of your decision while minimising the risk.
If you would like a review of your asset owning and lease arrangements, then talk to your Fifo Capital Business Partner today. We can make an introduction to our trusted asset finance partners.