Whatever your sector, equipment is essential for day-to-day business operations, productivity and growth. You might immediately look into buying what you need, but that’s not the only option, as a lot of equipment can be leased. It’s not always an easy choice, as it impacts more than just how you pay for something. Deciding between buying and leasing can have an effect on your cash flow, taxes, balance sheet, ability to borrow money, operational flexibility and long-term profits, so it’s not a decision to make on a whim.
Buying vs. Leasing Business Equipment
Leasing means paying to use equipment for a set amount of time, like renting. Buying means buying the equipment outright and owning it forever, or at least until you sell it.
When you lease equipment, the lender buys the item and your business pays to use it for a set amount of time, usually for a number of years. Depending on the terms of the lease, you may be able to give back the equipment at the end of the lease, extend the lease if you need to or purchase the asset eventually. Though you don’t own the equipment, it might give you the chance to use newer tools and machines that you couldn’t otherwise afford. Leases are often set up so that costs are spread out evenly, which makes it easier to keep track of cash flow.
When you buy business equipment, you’re the only owner. You can buy tools using cash reserves or a business loan, and the equipment becomes part of your business’ assets. This means it shows up on your balance sheet after you buy it. When you own the equipment outright, you have full control over how it’s used, it’s care and maintenance, upgrades and selling it.
The Impact on Your Business’ Cash Reserves
Leasing means the total cost is split into smaller, manageable payments that are usually payable monthly, meaning you have more money on hand for other things. There’s no need for you to save the entire amount before you can access the equipment your business needs. This is advantageous, as it keeps your working capital safe, keeps cash flowing and allows you to use cash reserves in other areas, such as growth.
Buying equipment requires a bigger up front commitment, and the deposit and monthly payments can be high. This can lower the amount of cash you have on hand, increasing the chance of you being short of cash in an emergency. However, once it’s eventually paid for, there’s no ongoing financial commitments to worry about.
The Total Cost of Asset Ownership
It’s not just what you pay each month that matters when you decide whether to lease or buy equipment, it’s what you pay in total. Leasing usually costs more in total because you are paying for flexibility, upgrade options and possible equipment maintenance. When your lease agreement comes to an end, you usually don’t get any value back, but you do have the freedom to lease something else, possibly a new and improved version. Buying costs more up front, but it can be cheaper in the long run, especially if the equipment lasts for a long time and keeps its value.
Think About Your Balance Sheet
Lenders, investors and other stakeholders might see your business’ financial situation differently if you lease or buy something. If you buy equipment, it shows up on your business’ balance sheet as an asset and depreciation is recorded every year. Though leased equipment can also show up on your balance sheet, it’s treated slightly differently, depending on the type of lease agreement you have.
Which is Better for Flexible Business Operations?
Financial concerns are important for any business, but so are operational needs. Leasing gives you options when the technology changes very quickly, or your equipment needs change over time. When your needs scale up or down, you can scale your equipment accordingly.
When you buy, you get less financial flexibility, but more stability. This is helpful if the equipment you use lasts a very long time, the technology changes slowly, usage is heavy, and the future of the equipment is easy to predict.
Business Responsibility and Risk
Owning and leasing things share risk in different ways. When you lease equipment, the provider still owns the item, so some risks are shared or lowered, especially when maintenance packages are included. But, you still have to follow the terms of the contract. When you buy equipment, you are completely responsible for repairs, breakdowns, upgrades and resale value. If equipment goes out of date quickly, owning it can cost a lot of money.
When Leasing Makes More Sense
Leasing equipment is often the best strategic choice if:
Your business is growing quickly.
Your cash flow needs to stay flexible.
Equipment in your industry is quickly outdated.
You want a budget that you can count on.
You want maintenance support.
When Buying is Usually Best
Buying usually makes more sense if:
You’ll use the equipment for a long time.
The equipment will always be worth something.
You want to be in charge of ownership.
You have a strong cash reserve.
You want to keep costs down over time.
There’s no right or wrong when it comes to deciding whether to lease or buy business equipment. Your financial situation, the state of your industry and the type of equipment will come into play, as will how much flexibility you want from asset ownership.
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Whatever your sector, equipment is essential for day-to-day business operations, productivity and growth. You might immediately look into buying what you need, but that’s not the only option, as a lot of equipment can be leased. It’s not always an easy choice, as it impacts more than just how you pay for something. Deciding between buying and leasing can have an effect on your cash flow, taxes, balance sheet, ability to borrow money, operational flexibility and long-term profits, so it’s not a decision to make on a whim.
