While the understanding of limited resources may vary based on the size and asset of an organization, it’s a stark reality that all businesses have to live with. Rationing resources to keep the business functioning is a daily headache for many business owners.
Getting equipment for work is one of the many investments that businesses have to make. The decision on whether to make an outright purchase or lease is a balancing act that requires a lot of consideration, especially for equipment that costs a lot.
In this article, we’ll be comparing the pros and cons of both options to help every reader make the appropriate choice for their situation.
When making an outright purchase of equipment, you need to confer complete ownership on you with the right to use as you deem fit.
Advantages of Buying Equipment
- You can make alterations, or even fabricate the equipment from scratch to meet specific requirements. For more information on industrial fabrications, you can check https://www.craftsmenind.com/
- Equipment that you own count as assets and can be useful when looking to obtain asset-based loans.
- If the equipment has considerable sell-on value, you might be able to recoup some of your expenses by selling at a later date.
- You’re legally allowed to remove the cost of some newly purchased equipment from your taxes as an expense. This is backed up by section 179 of the Internal Revenue Code. This government tax incentive can allow you to shave off as much as 25% of your purchase cost.
- Other properties that aren’t eligible for the tax incentive mentioned earlier might qualify for property depreciation deduction.
- You’ll likely not need to deal with complicated paperwork, negotiations, and contracts to make an outright purchase.
Disadvantages of Buying Equipment
- The huge financial layout can result in financial issues for the business, if not properly managed. Even in cases where external funding is utilized, you’ll typically be required to put up 10-20% of the cost.
- You’ll be responsible for all maintenance and repair costs.
- If you’re in an industry with fast-changing technology, you can easily get stuck with outdated equipment.
Advantages of Leasing Equipment
- Leases typically require a small upfront investment to get. While they may end up being more expensive over time, they are ideal for a company that’s low on working capital.
- Most leases can be arranged in a short period of time, reducing the lag or downtime as a result of waiting for equipment to arrive.
- Unless otherwise stated in the agreement, leases typically confer the responsibility of maintenance and servicing on the lender. This reduces operational costs on your end.
- If your business has to move from site to site, leasing equipment from lenders nearby can save on storage and transportation costs.
- Leasing rentals allow your organization to be easily adaptable to technological change. You can always switch to lenders with newer, better models of whatever equipment you need.
- Rental expenses are typically viewed as a tax-deductible expense, unlike purchases that are taxed at a depreciating rate.
Disadvantages of Leasing Equipment
- Overtime, leased equipment tends to cost more than if they were purchased outright.
- While maintenance is the duty of the lender, the timing of it is also subject to them. This can be very problematic, as the timing might be at crossroads with that of the lending company.
- Lack of equity in the equipment means that significant alterations can’t be made. This may be problematic for production companies that have to meet precise specifications.
Three Questions to Help You Make a Decision Between Buying and Leasing
Understanding the pros and cons of both options should be enough to help most people make a decision. However, if you’re still confused as to what option is best for you, here are three questions that can help you find the right answer:
How important is the equipment?
Just how vital the equipment is to your offering is a significant determinant of whether you should buy it outright or not. Leasing equipment comes with unexpected challenges. Defaults due to unforeseen circumstances are a real danger, regardless of how reliable the lender typically is. It’s imperative that a business owns as much of its critical equipment as it possibly can.
How much does the equipment cost?
While this may seem like a simple question, the real answer can be complicated. The actual cost of equipment is easy to find out. However, the answer to this question should always take into account your company’s finances.
If the equipment is more expensive than you can afford off your books, then there may be some merit to leasing it. This may not be the case, however, for equipment that’s crucial to the business. Multiple financing options can be explored to fund the purchase of crucial equipment.
Your cost analysis should also include the second-life value of the equipment. A high second-life or secondhand value equipment gives you the opportunity to sell off at a later date to recoup some of your investment.
How long does my business need the equipment?
Typically, if you need any equipment for a short while, it makes more sense to lease it. Long-term needs, on the other hand, may require an outright purchase. The longer you hire an item for, the more you have to pay for it. If you lease an item for long enough, you’ll end up spending more than you’d have spent if you had made an outright purchase.
Keep in mind that all of this is subject to your company’s finances. Even in instances where it would have otherwise made complete sense to make an outright purchase, you may need to go for a lease to keep your books balanced.