Like most things in business (and life), choosing between buying and leasing equipment isn’t always black and white. Whether it’s computers, cars or machinery, there are a number of factors to consider. It’s important to think about what kind of equipment you want, how long you intend to keep it, and whether spreading the cost matters. Here are the pros and cons of buying and leasing equipment for your business.
Leasing or renting is good for equipment that has high maintenance costs, is at risk of becoming quickly outdated, or is only used irregularly. The smaller upfront costs and monthly repayments can also help your cash flow. However, leasing will cost more, and can be complicated and inflexible.
- Up-to-date equipment. One of the most attractive benefits of leasing over buying is having the flexibility to upgrade. This is especially relevant if you are leasing IT equipment – many technology products have the pesky habit of becoming obsolete a couple of years after investment.
- Spreading the costs. One of the most common challenges small businesses face is maintaining a healthy cash flow, which means that investing a large sum of money into equipment isn’t always feasible. Leasing equipment allows you to spread and anticipate the costs into monthly payments.
- The leasing company may take care of repairs. This is an aspect of renting that appeals to SMEs. Fixing broken equipment can be really expensive. Often, leasing companies pay for repairs.
- Tax deductions. It depends on where you live and what you are purchasing for your business, but equipment costs tend to be tax deductible.
- Leasing costs more. This is probably the biggest drawback of renting equipment. Built into your monthly repayments are rental fees, meaning that by the end of your lease period, you will have paid more to rent the equipment than buying it outright.
- Inflexibility. While leasing can afford you more long-term flexibility, the rental agreements themselves can be inflexible and difficult to terminate. Like some loans, ending the repayment period early can incur fees.
- Complexity. Leasing agreements can be complicated, and it might be a good idea to run things by a lawyer for peace of mind. This can add time and money to the process.
Buying equipment provides you with the legal and psychological security that the equipment is yours. You can decide what to do with it, and once the initial costs have been paid off, there are no monthly repayments. However, meeting the startup costs may be challenging for small businesses, and there’s less flexibility to upgrade in the future.
- It’s yours. You don’t have to give it back in a couple of years or pay for damages if the leasing company is unsatisfied by its condition. By owning it, you can also later sell it to recoup some of the initial costs.
- One-off payment. Once the equipment is purchased it’s yours – and you don’t necessarily have to make the purchase with cash reserves. Buying equipment with a loan allows you to make a one-off investment but spread the costs through loan repayments, which may work out to be less than the repayments on a lease.
- You choose how to maintain it. As mentioned before, some leasing companies pay for equipment repairs and maintenance. Others will only accept repairs by companies they are partnered with, which can be expensive. As the owner of the equipment, you decide the plan of action.
- The cost. If you don’t have the cash reserves and can’t get a loan, you might not be able to afford purchasing equipment outright.
- Equipment isn’t evergreen. Again, this is particularly pertinent when it comes to technology. You need to think, and carefully, about the cost of replacing equipment if it becomes obsolete a few years down the line. Calculate the risk, likelihood and costs, and put it into your business roadmap.
If your equipment requirements are small and not extremely sensitive to changes in technology, it might be better to buy it and save on leasing fees. However, if your small business needs a hefty haul of vehicles or computers, leasing may be a better, more flexible and feasible option.
Originally published March 8 2017 , updated April 27 2017