Business Equipment: Leasing vs. Buying Equipment

Business Equipment: Leasing vs. Buying Equipment

Business Equipment: Leasing vs. Buying Equipment

When it comes to getting the office equipment, tech equipment, or any of the equipment you need to run your business, there’s often a question that business owners ask: lease vs. buy equipment? Which is a better decision in the long run?

The truth is, to purchase or lease equipment has its own benefits and drawbacks. You need to determine what matters to you: having steady cash flow and a lower monthly payment? Having an asset on your balance sheet that you can sell down the road? Being able to turn in equipment and buy the latest technology?

We’ll cover both leasing and buying equipment in this article to help you make the right decision about whether to lease vs buy equipment for your business.

Key Differences Between Leasing vs. Buying Business Equipment

The primary difference between buying and leasing equipment is that with the former, you own the asset until you sell or dispose of it. With leasing, you have access to the equipment for the life of the lease, and then you give it back to the company you leased it from—unless they offer you the option of purchasing the equipment at the end of the lease.

Many businesses prefer to lease equipment because it helps them conserve cash flow (typically lease payments are lower than purchase payments), though there are benefits to ownership as well.

Leasing Business Equipment

Leasing business equipment consists of making monthly payments to rent some type of equipment without owning it. At the end of the term, the lessor must relinquish ownership of the equipment. There may be the option to purchase it at a reduced price at the end of the lease.

There are different types of leases, including the capital lease, sale leaseback, TRAC lease, and others.

Advantages of Leasing Business Equipment

So why consider leasing? There are many benefits to doing so over purchasing equipment.

Conserve Working Capital

The fact that equipment leases typically have a lower monthly payment than a loan for purchasing equipment is appealing to many businesses because it enables them to have a more steady cash flow to put toward short- and long-term goals.

Access Better Equipment

Speaking of those lower monthly payments: spending less on equipment also means you may be able to afford better equipment than you would if you purchased it outright. Maybe you could only afford to purchase used equipment, but with a lease, you get the latest technology at a lower price.

Spend Less on Equipment Up Front

Many bank loans and SBA loans require collateral or a down payment to minimize the risk the lender takes on, but with a lease, there is none. The equipment is considered the collateral, so if you stopped paying your lease, the lender would take the asset back.

Deduct Rental Payments on Taxes

This is true of purchasing equipment as well, but with an equipment lease, you may be able to deduct your rental payments as long as you are using the equipment in your business. The only caveat to this is if the IRS recharacterizes the lease as a sale, such as in the event that you decide to purchase the equipment at the end of the lease.

You Don’t Own an Outdated Asset

Equipment like heavy machinery or computers depreciate quickly, and if you purchase them new, you’re left owning an asset that is worth a fraction of what you paid for it just a few years later. With a lease, on the other hand, you relinquish ownership at the end of the lease and can turn around and lease the latest version of the equipment.

Disadvantages of Leasing Business Equipment

When it comes to an equipment lease vs. loan, there are some factors that may deter you from choosing the leasing option.

There May Be a Higher Overall Cost

Despite the fact that your monthly payments may be lower with a lease than an equipment loan, in the long run, you will likely pay more for a lease, and then you don’t have an asset to show for the expense.

You Can’t Cut Out Early

If, halfway through the lease, you decide you don’t want or need the equipment any longer, you won’t be able to get out of the lease agreement. You will either have to continue making the monthly payment or pay a lump sum for the rest you owe.

You Don’t Own the Equipment

When you purchase, say, an industrial mixer, you can sell it down the road, even if it is for less than you paid for it. Some equipment holds its value better than others. But with leasing, you don’t have the financial benefit of owning an asset

Buying Business Equipment

Now let’s look at the flip side of leasing: buying equipment outright. Purchasing business equipment may require an upfront cash outlay, and then you have loan terms that require monthly payments. At the end of this term, you own the equipment and can do what you like with it.

Now let’s look at the advantages and disadvantages of buying business equipment.

Advantages of Buying Business Equipment

There’s a lot to love about the ownership of equipment, even if you take out a loan to pay for it.

It’s Yours

Once you finish paying off your equipment financing, the asset is yours to do what you please with. You could sell it and recoup a little of the investment you made, then turn around and buy newer equipment. Or you could hang onto it as long as it’s in good working condition.

There are Tax Deductions

Purchasing equipment outright has some tax benefits that you may enjoy. You can deduct up to the full purchase price of the equipment in the year you bought qualifying equipment, which will reduce your taxable income. This is called bonus depreciation and is in contrast to writing off the asset over its useful life.

Equipment Financing Lets You Afford the Equipment

Not every business can afford to drop hundreds of thousands of dollars on expensive equipment, but taking out a loan can ensure that you get the equipment you need without eating up all your cash.

If you don’t qualify for a low-interest equipment loan, you may find other alternatives like cash flow loans, merchant cash advance loans, or invoice financing to cover the expense. If it’s a lower-cost piece of equipment, even business credit cards are an option to consider. Get your free business credit scores with Nav and monitor your business credit report to know what kind of financing you will qualify for.

Disadvantages of Buying Business Equipment

Wherever there are pros, there are also cons. Here’s what to be aware of when considering buying equipment.

It May Cost You More Up Front

Typically, loans require a larger down payment up front, which may mess up your cash flow if you don’t have a chunk of cash laying around. 

You’re Responsible for Maintenance Costs

Many don’t consider that, in addition to the purchase price, there are also maintenance costs through the life of the equipment you are buying, so factor these into the total cost of buying equipment.

You May Incur Long-Term Debt

If you do take out financing for your equipment, you will have loan payments for several years, which may impact your ability to take out other financing to grow your business or affect your business credit scores.

You’ll Have Depreciated Equipment

By the time you finish paying off your loan for the equipment you purchased, it may be outdated, and its value will be far from what you paid for it.

Should I Lease or Buy Business Equipment?

Now that we’ve done a little lease vs. buy analysis, it’s up to you to determine whether buying vs. leasing is the best option for your business. 

When making the decision, ask yourself:

  • How much can we afford to pay each month for equipment?
  • Is it important that we have ownership of the asset?
  • Do we have cash to put down up front?
  • How long will we use this equipment?

Nav’s Final Word: Lease vs. Buy Equipment

Leasing has some great financial benefits, such as lower payments and not being saddled with an outdated piece of equipment. But buying, on the other hand, may be more affordable in the long run, and you have an asset you can then sell.

Carefully consider each option as well as your business goals, and then research business financing options that specialize in equipment financing or leasing. 

This article was originally written on August 27, 2020 and updated on October 21, 2020.

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