It always comes back to Detroit. Most of the general public – and many business professionals – had never even heard the term “lease” until Motown heavily promoted leasing as a way to bump up new car transactions in the wake of the recession that crippled the U.S. economy in the 1970s.
A lease gave the potential driver of a new car the chance to get “more bang for the buck,” by requiring lower initial costs and monthly payments than would be needed in a conventional financing arrangement. The car-driving public responded positively to the arrangement and,40 years later, leasing remains a very popular option at auto dealerships across the country,
Leasing is also a common option for acquiring equipment needed by companies in many industries.
But leasing is not always clearly better than buying. Before you make a commitment to either arrangement, you need to look at the pros and cons of both.
Equipment Purchase
Advantages of Buying Equipment
Tax advantages
The tax benefits of an outright equipment purchase come in two forms.
Depreciation: The cost of acquiring the equipment is “written off” over a number of years, offsetting part of your company’s income and lowering its tax liability. Depreciation schedules are determined by the IRS and vary based on the type of equipment in use.
Section 179 Deductions: Section 179 of the IRS code lets your company deduct 100% of the purchase price of equipment in the first year. For 2013, up to $500,000 in purchased equipment can be deducted. Needless to say, Section 179 has become extremely popular with business owners on both the buy and sell sides of the equipment purchase equation. There’s talk in Washington of making the deduction permanent, but no legislation is pending. Look for updates at MP Star Financial later this summer.
Ownership
It’s straightforward and obvious, but another benefit of buying equipment is that you actually own the equipment. As opposed to a lease, there’s no end to your company’s use of or access to the equipment. This is especially attractive for equipment or assets that are unlikely to become outdated (e.g., office furniture, landscaping equipment).
Disadvantages of an Equipment Purchase
Higher Upfront Costs
Buying equipment can initially cost your company a lot. Depending on the cost and nature of the equipment purchase, your company’s credit history, and the general level of interest rates, your upfront cash outlays can be substantial.
This can hurt your company’s cash flow management, particularly if the equipment purchase was unexpected or due to an emergency.
Obsolescence
You’re generally stuck with the equipment you buy. As manufacturers make improvements or adjustments to their products, you won’t be able to benefit from the changes unless you bite the bullet and set your current equipment aside while there’s still some useful life in it.
If your company’s productivity and efficiencies are dependent on employing state of the art equipment, an outright purchase might not be in your best interest.
Low Re-Sell Prices
There are exceptions but, generally speaking, you shouldn’t count on recouping much of your equipment investment in the re-sale market. Especially today, there are too many attractive options for getting new equipment and avoiding the problems associated with the wear and tear of the previously owned.
Equipment Leasing
Advantages of Leasing Equipment
Leasing sometimes, but not always, requires a down payment, and 10% down is normal. Whatever the requirement, it’s generally lower than what’s required for a purchase.
Tax Benefits
While not as attractive as the tax advantages associated with an equipment purchase, some costs associated with equipment leasing can usually be expensed at tax time. Consult with your accountant or tax adviser for details.
Easier Terms
If your company is new, or if your credit isn’t stellar, a lease generally allows flexibility in terms of longer payment schedules and other factors that can make it affordable.
Equipment Upgrades are Easier
Your company doesn’t need to be as concerned with its equipment becoming outdated or ineffective- or just wearing out due to normal use – if it’s returning it at the end of the lease period. In a leasing arrangement, the burden of obsolescence is shifted to the leasing company.
When the lease is up, your company can start its next lease with improved and updated, or at least new, equipment.
Disadvantages of Equipment Leasing
Lack of Ownership
At the end of the lease period, you need to make other arrangements, because you need to return the equipment to the leasing company. This can be inconvenient and potentially expensive.
Potentially Higher Overall Costs
Get with your accountant and crunch some numbers.
It often turns out that while leasing can definitely help your cash flow because of the lower initial costs and flexible terms, the overall costs can eventually total more than a conventional purchase would.
You’re tied in
Your company is obligated to pay through the entire lease period, even if you have stopped using the equipment. And, since it’s not yours, you can’t sell or lend it to another company.
The Bottom Line on Buying vs. Leasing Equipment
When trying to determine whether to buy or lease, work with your accountant to figure out the actual cost of both options, including tax benefits and any re-sale value of the equipment.
But also consider less obvious factors, including your company’s needs over the next three to five years, and the likelihood that the equipment becomes ineffective or obsolete over the projected period.
Image courtesy Aims Freepik
MP Star Financial’s team of advisers can help you make decisions regarding your cash flow management, business funding, and business equipment leasing and purchasing needs. Call for more information at (800) 833-3765, extension 150.