It’s a question almost every business owner confronts at one time or another: Does it make more sense to buy or lease your next piece of business equipment, vehicle, or facility? It’s a tough question because the answer is almost always, “It depends.” Both options offer various advantages, depending on your particular business situation.
In general, leasing is often the better option for a business with limited capital or that needs equipment which must be upgraded or updated frequently. An established business with substantial assets and a solid credit rating may be better served by buying, especially equipment that has a long, usable life.
“Since our business is more labor-intensive than capital intensive, it relies more on infrastructure than production machinery or research equipment,” says Michael Mandala, CEO of BlueHill Strategic Relations. While his company does purchase some business assets outright, he’s opted to lease the backbone of its infrastructure—computers, telephony, copy machines, other office equipment—for financial reasons. “Leasing lets us deduct the cost from our top line and reduces our tax burden. If we purchased our equipment, we’d have to amortize our costs over several years.”
There are other advantages that make leasing especially attractive to early-stage and smaller businesses, says S.E. Day, a business and consumer finance advocate, host of the Legally Steal show, and author of Mastering the Business Credit Maze. These can include lower monthly payments, since you are simply renting a percentage of the equipment’s total value; conservation of capital, since down payments of 20 percent or more are often required when purchasing; and buy-out options, which are frequently offered on leased equipment and may allow you to acquire it at an attractive price at lease end.
Buying offers a different set of rewards, an obvious one being ownership. That’s a particularly significant advantage when the item being acquired is projected to have a long, useful life and is unlikely to become technologically outdated in the near future. “Purchasing increases the asset side of a smaller business’s balance sheet,” Mandala says. “That does wonders for us and 52 million other small and midsized businesses here in the U.S. by helping us establish an asset base that we have the potential to borrow against in the future for capital to expand our enterprise. In the current lending atmosphere, it is very hard for businesses with less than $10 million in revenue to obtain a meaningful loan. Lenders want to see collateral to help mitigate their risk.”
Day says the most important factors for businesses in the $100,000 to $1 million annual revenue range to consider in making the buy vs. lease decision are the length of time the equipment will serve its intended purpose before having to be upgraded; whether a lease is open-end (requiring the lessee to purchase the equipment at the end of the lease) or closed-end (no purchase requirement); and the type and use of the equipment being considered. Mandala stresses the importance of weighing the decision’s potential impact on cash flow. “Often, that’s more important than looking at what a purchase might add to the asset side of your balance sheet,” he says.
In some cases, a combination of buying and leasing is the best solution, and that’s just what Day does in his business, which requires travel with camera and computer equipment. “Buying the vehicle makes sense because of the high mileage and heavy usage, while leasing the camera and computer equipment gives me the most affordable access to updated technology.”
At the outset, be sure to consider all the potential impacts the buy-vs.-lease decision is likely to have on your business, and tap into whatever expert advice is available to you, such as your banker and accountant. They can help you decide whether the cash flow advantage and improved access to upgraded equipment that leasing often provides are more important to your business than the boost to your balance sheet that purchasing might deliver.
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