Just about every business needs equipment to start and grow and at some point, you’ll need to decide what’s best for your business: Should you buy or lease equipment?
The answer may clearly be one or the other, although depending on the phase your business is in – startup, early expansion or later-stage growth – and what industry you’re in, as well as your financial capacity, it’s often a mix of both.
There are essentially two types of equipment that a business may need. First, there are basics that are needed to set up office and back-of-house operations, such as laptop computers, printers and phones.
In addition, there may be larger-cost equipment for specialized services, such as state-of-the-art medical or fitness equipment, or you may need equipment for the production of goods and services. This can include things like landscaping and construction equipment or restaurant and craft-brewery equipment and everything in between, as well equipment to store, transport and ship goods.
Here, we look at the pros and cons of buying and leasing, along with some funding options that can help you determine which may be the best option, whether you purchase or lease.
- When you pay cash upfront for the equipment, you won’t incur fees or interest charges
- Your business owns the equipment, which increases the overall assets that are included on your balance sheet
- You have the highest degree of control and you can use it for as long as it’s productive or choose to sell it at any time
- You can depreciate the costs of purchased equipment on your business’s taxes, reducing your tax liability
- To buy equipment, you need more money up front
- You’re financially responsible for expenses related to service and maintenance, including parts and labor
- Your equipment can become obsolete and end up having little or no resale value
Financing options for equipment purchases:
- Use cash from your business
- Charge purchases to a business credit card or to a business line of credit
- Finance major equipment purchases through manufacturers and distributors
- Use a business loan, such as a U.S. Small Business Administration (SBA) 7a loan, for equipment purchases (these loans typically offer better interest rates and longer repayment terms than manufacturer financing, although they require some advanced planning)
- Leases have lower upfront costs than purchases, as you typically only need the first month’s lease payment (and possibly a down payment or other security payment)
- This is a great option when equipment needs to be updated frequently due to wear or updates, as you won’t have to deal with outdated or unusable equipment
- Lease payments can usually be deducted as business expenses, reducing tax liability
- With most leased equipment, although you may be responsible for some basic maintenance, you likely won’t have to pay for major maintenance or service
- When you don’t own equipment, you don’t build equity, you don’t have an option to sell the equipment and you can’t make any back when you’re done with the equipment
- Leases cost more in month-to-month cash flow, because of monthly payments with interest
- For the specific equipment you need, the availability of equipment options may be more limited than it would be for purchases.
- Capital leases: These are the most common leases and they’re best suited for acquiring expensive equipment that you intend to keep as a long-term asset. With this type of lease, even though the equipment is leased, you can claim depreciation and interest expenses on tax returns, as if it’s owned, and the equipment is considered both an asset and liability on your business’s balance sheet. You’re also required to pay for maintenance, insurance and taxes.
- Operating leases: These types of leases are typically used when financing equipment with a short shelf-life or for equipment that you plan to replace frequently or at the end of the lease. With this type of lease, the equipment is considered rented and the lease payment is considered a rental expense. Payments are considered as operating expenses and are shown on your business’s profit and loss (P&L) statements.
- A short-term loan or line of credit can also be used to cover lease payments as your business launches and grows. For this option, ensure that the terms you receive are better than what you’d get from a capital or operating lease.
Additional, important considerations
In addition to financial outlay, there are some other key considerations between equipment that’s leased or purchased. These include:
- Ongoing maintenance, including the cost and availability of parts and skilled repairpersons
- Tax deductions that may be available and that can offset costs
- Likely usable life and flexibility
What’s right for your business at one point in time may not be the wisest choice later on. That’s because your business’s needs will change over time and what’s right to do today may not be the best solution as your business grows.
Before you decide, get expert guidance
Whichever way you lean, it’s a great idea to run your situation by your accountant. Your accountant is a key part of your business team and can advise you as to whether your plan makes the most sense now, as well as help you plan tax-savvy strategies that can save you money and make the most of your equipment investments.
When you’re ready to move forward and want to know about affordable loans and lines of credit, contact us. Every day, we help businesses get the funding they need to launch, grow and succeed.