Buying vs Leasing. Which is Better?
In our very first blog post (Dec 21, 2021 - Lease vs Loan: We Break it Down), we discussed the advantages and disadvantages of leases and loans when buying equipment for your business.
In this blog, we’re looking at buying vs leasing.
If a piece of equipment costs $50,000, which option should you choose?
It really depends on the financial position of your company, if the equipment requires modifications and how long this equipment is expected to last.
Financial Position
If you have the financial resources in the form of cash on hand, buying the equipment will probably be a cheaper option in the long run. However, using a bank operating line of credit is not a fiscally responsible way to finance equipment. A bank line of credit is intended for short term use to bridge your collections activities and inventory purchases. Tying it up with long term assets may hinder your short-term cash management.
If you want to conserve your cash and bank lines in case of an economic downturn or for other ongoing expenses, leasing may be a better option. In a lease, there is typically no down payment requirement depending on the credit profile. The monthly payments are spread out over the course of 36 – 84 months. In addition to conserving cashflows, leasing offers the added benefit of deferring the sales tax on the purchase. You pay sales tax on the lease payments over the term rather than all of it upfront. Lease payments are also often eligible for tax advantages which may benefit the business
Life of Equipment
Although you may have the financial resources, you need to examine how long you plan to keep the equipment. If you plan on using the equipment for a long time and intend on keeping it, a cash purchase (if you have the means) or a lease-to-own would be the most beneficial. If you plan on using the equipment for only a short period of time, an operating lease with return provisions would be a great alternative. This way, you are only using what you need for the time you need it. This method also allows you to return the equipment and exchange or upgrade it for the newest technology.
A Way Out
You may buy a piece of equipment using cash because the deal was too good to pass up and you didn’t have the time to put together a credit application. You then realize that you need to recover the cash used for the purchase. Consider a sale leaseback where you refinance the equipment cost in a lease after the fact.
Your decision to buy or lease depends on many factors unique to your business. At LFS, we can help you make the right decision by providing honest advice. Call us today to discuss your options!