Whether you’ve opened a coffee shop or a manufacturing facility, you’ll need equipment to keep things running. From computers, chairs and desks to even heavy machinery, it’s possible to lease almost anything for your business. The question is – does it make financial sense?
Equipment leasing can provide a lifeline for cash-strapped businesses in need of the tools of the trade. But it’s not always the smartest decision – in some circumstances, the cost benefit of buying equipment, rather than leasing it, may make more sense.
How does equipment leasing work?
Equipment leasing is essentially a rental agreement where the owner buys the equipment and then rents it to the business for a monthly rate for specified number of months. The financing company may be a bank, leasing company or the equipment manufacturer. In some cases, the agreement may also include an option for the company to buy the equipment, for some stated price, at the end of the lease.
The amount of the monthly lease payment is typically based on the cost of equipment, the interest rate, your creditworthiness and the estimated residual value of the equipment at the end of the lease term.
If your capital is limited or you need equipment that needs to be upgraded every few years, then leasing equipment can be a good option. However, if you’re an established business or your equipment has a long usable life, then purchasing equipment may be a better option.
Let’s take a look at the some of the pros and cons of leasing equipment for your business.
- Purchasing equipment puts a strain on your cash outflow. Leasing the equipment instead can help you better manage your cash flow, because there is less expense up front and you have a predictable payment every month, making it easier to budget over the long run.
- Lease payments can be tax-deductible business expenses. If you own the equipment outright, there would be annual depreciation expenses. (NOTE – you’ll want to confirm this with your tax accountant for your specific situation.)
- Leasing can help you stay up to date on equipment that is frequently updated due to technological changes. If you will need to update your equipment on an annual basis to remain competitive, leasing allows you to avoid being stuck with outdated equipment.
- With leasing, you don’t have to pay to maintain equipment. If something breaks or needs routine maintenance, the leasing company is in charge of fixing the equipment.
- Leasing gives you more choices in terms of the equipment you choose. You’re not as restricted by high up-front costs as you would be when buying equipment. This opens the doors to products you may not be able to afford otherwise.
- Since you don’t own the equipment, you have no equity in it. This means you do not have the option to sell the equipment when you’re done with it to make some money back.
- When you lease you’ll typically pay higher costs over time than you would if you paid up front. Most leasing options require interest to be paid as well, making the overall cost more expensive.
- The length of the lease may be longer than you actually need. And if you don’t have the ability to negotiate on the term, you may be stuck with the equipment longer than you want.
- While you don’t need to pay for maintenance or service on the equipment, you’re at the mercy of the equipment owner to get things back up and running if they break down. This could cause challenges for your operation.
- You’ll need to deal with the rental contract which may take some time and effort on your part. You may also want to consult with a lawyer before signing the contract. It’s important to fully understand what you’re agreeing to before you sign on the dotted line.
When evaluating whether to buy or lease, make sure to weigh the benefit of improved cash flow against the cost leasing built into your rental agreement. If leasing makes sense for you, this method of financing can be a very good way to grow your business.