Filed under Finance
by Vacillating in Vermont | May 20, 2012
My printing business is growing and I'm going to need some new equipment. Would I be better off leasing or buying?
Vacillating in Vermont
Dear Vacillating in Vermont,
The classic answer to your question is a resounding "that depends."
Leasing assets, rather than purchasing them, is a form of financing that avoids the large down payment frequently required for asset purchases, thereby freeing up funds for other business expenditures. Leasing companies, as well as banks, some suppliers and even manufacturers, will gleefully rent equipment to qualified small businesses.
On the other hand, since the proverbial free lunch is still non-existent, there is a cost associated with this form of alternative financing. In order to answer your question as to whether you'd be better off leasing or buying new equipment, you'll need to work through the relative costs and benefits of each choice. Here are a few points to consider.
The advantages of equipment leasing include:
The disadvantages of equipment leasing include:
The Toolkit has an extensive explanation and case example on the lease vs. buy decision, which you may find helpful to review in detail.
Because more businesses are using leases, greater creativity in lease terms and purposes are becoming available. Leases can be drafted so that they resemble a long-term purchase of capital equipment. The term of the lease approximates the expected useful life of the asset, and the total of lease payments is keyed to the underlying cost of the asset. The lessee pays insurance and taxes on the asset. The lessee may be required to purchase the asset at the end of the lease, or a purchase option may be available at the end of the lease or for a stated price during the term of the lease.
Also, be aware that, as your ownership options/rights are increased in a lease agreement, your financial statements may have to show the lease as an asset purchase, with an accompanying listing of the asset and a liability for the amount of the "loan." These changes may negatively affect your debt/equity ratios and your net income.
And for those readers who are considering real estate rather than equipment, take a peek at our Toolkit real estate link for more information.
Personally, I would always prefer to buy rather than lease, but sometimes that's a luxury that just can't be afforded. Leasing equipment or vehicles makes more sense than leasing real property since realty is the real wealth builder for small businesses. Consider the auto dealer on the edge of your town who eked out a living selling maybe a dozen vehicles a month for years, only to become a multi-millionaire after selling his 14 acres to Wal-Mart.
One final tip—whether you lease or buy, think long and hard before you sign and pay for a maintenance contract. You'll almost always be offered such a contract, and in general, they are almost never worth what you'll pay for them.