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Is it better to lease or buy equipment for business?

19 Jul 2019

Expansion and upgrading assets like equipment and the capital assets is a part and parcel of every business. This ranges from periodically upgrading factory machines, acquiring latest gears, updating retailer stores, fixing warehouses, and even refurbishing the interiors of an office. While these investments benefit an enterprise making it more efficient, it also raises the dilemma to decide whether to lease or buy these assets. The benefits of leasing vs buying equipment are aplenty, however, both have several potential pitfalls alongside.

 

Before you decide whether to lease or buy these assets let’s take a look at the advantages and disadvantages of the same

leasing vs buying equipment

Advantages of Leasing an Equipment

  • Keeping equipment up to date

    A lot of equipment, especially related to computing, information technology, audiovisual communication, etc. becomes obsolete very soon. Acquiring them on lease means that you can easily pass the financial burden of obsolescence to the equipment leasing company.

  • Predictable monthly expenses

    A lease means that you have a predetermined monthly line item. This eventually assists you to plan your budget more effectively.

  • No upfront payment

    Cash flow is a crucial part of any business. While you may have working capital kept separately for such expenses, there are times when spending a huge amount of money to buy equipment is a struggle. Especially when we are talking about leasing equipment for the manufacturing industry. Leases rarely require a down payment, allowing you to acquire new equipment without tapping into much-needed funds.

  • Keeping up with your competitors

    Leasing enables an enterprise to acquire sophisticated and expensive technology without splurging. This way you can keep up with your bigger competitors without draining your financial resources.

  • Tax-deductible

    Leasing equipment further reduces the net cost of your lease as the lease payments are usually deducted as business expenses on your tax return.

  • Flexible terms

    Unlike buying, leases are easier to obtain and have flexible terms especially for payments which can bring a significant advantage, more so if you have bad credit or require negotiation for a longer payment plan to lower your costs.

  • Easier to upgrade equipment

    Addressing the problem of obsolescence, leasing allows businesses to replace equipment that is outdated such as computers or other high-tech equipment. Here, a lease passes the burden of obsolescence onto the lessor, freeing you to lease new, higher-end equipment after your lease expires.

  • Keeps cash flowing

    Leasing enables an enterprise to free up significant capital for businesses, which can be used to finance other areas, such as building your team, buying new labelling and packaging equipment, etc.

Disadvantages of Leasing an Equipment

  • You end up spending more in the long haul

    As a lessor also needs to cover up their expenses, as an enterprise you will end up paying more than the price of the equipment itself.

  • You don’t own it

    Unless the equipment has become obsolete by the end of the lease, you don’t build equity in the equipment.

  • Obligation to pay for the entire lease term

    While a few leases give you the option to cancel the lease if your business changes direction, in most cases you are obligated to make payments for the entire duration even if you stop using the equipment. Even if you cancel the lease as the leased equipment is no longer required, you might end up paying a large early termination fee.

  • No depreciation deduction

    You cannot claim a depreciation deduction on your tax return in spite of the fact that you can claim the lease as a business expense.

Advantages of Buying an Equipment

  • Buying is easier than leasing

    Buying equipment is any day easier than leasing in many aspects. You can simply decide what you need, then go out and buy it. Whereas, when taking out a lease you will have to complete at least some paperwork, including updated financial information, knowledge about where the leased equipment will be used, etc. Moreover, lease terms are at times complicated to negotiate and turn out to be more expensive than buying equipment.

  • Maintenance lies in your hands

    More than often leasing companies lays out the specifications regarding maintaining the leased equipment. Whereas you can determine the maintenance schedule yourself when you buy the equipment outright.

  • Your equipment is deductible

    The Indian laws allow you to deduct the full cost of newly purchased assets in the first year. On the other hand, you can only deduct the monthly payment with most leases. This is profitable in case you are purchasing huge industrial equipment that comes at a hefty price.

  • Complete ownership

    One of the most obvious advantages of buying business equipment is that you gain complete ownership of it which is especially profitable when it has a long useful life and is not likely to become technologically outdated in the near future.

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Disadvantages of Buying an Equipment

  • Initial payment for required equipment may be too much

    You might have to either tie up lines of credit or cough up a hefty sum to acquire the equipment your enterprise requires. Even if you plan to borrow the money and pay a monthly EMI, most money lending banks require a down payment. Instead, these lines of credit and funds can be utilized elsewhere for marketing, advertising or other functions that can help grow your business.

  • You’re stuck with outdated equipment

    Equipment, such as those related to computing, information technology, communication and related machines, become obsolete quickly. A small business may require to refresh their technology every few months which means that in most cases either you are stuck with old equipment or suffer a loss when you have to upgrade it.

Buy or Lease Equipment: How Do You Decide?

The decision of leasing versus buying equipment largely depends on the type of business you are in. If the equipment your business requires does not need frequent updating, it is better to invest and buy one. Many financial institutions have very simple criteria to lend a loan. You can also make use of both services, buy what you think is a viable option and lease the ones that update in shorter durations.

 

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