June 13, 2018
Unbiased Financial Information Provided by Financial Finesse
Ask enough business owners, and you'll hear plenty tout the advantages of buying office equipment, while others swear by leasing. How can you decide whether leasing or buying is better for your own business? Know the pros and cons of each option.
Advantages of Leasing
- Capital preservation. The single biggest advantage of leasing is that you don't have to come up with a big chunk of cash. Under a typical lease agreement, only the first and last months' payments are due when you sign the contract. For many business owners, a lease means avoiding a high-interest loan or credit card purchase. The end result is that you get the equipment you need and preserve your company's capital.
- Tax deductions. Lease payments are tax-deductible overhead expenses. You do not need to depreciate the asset over five to seven years, as you do with capital expenditures.
- Flexibility to upgrade. Many lessors offer the opportunity to upgrade during the term of the lease, or they'll let you add equipment to a master lease. Your leased equipment can grow with your company.
Disadvantages of Leasing
The major disadvantage of leasing is that you're paying rent, and, in the long run, it's more expensive to rent than it is to own. Even if you have the option to purchase the equipment after the lease term ends, you'll pay a higher total price than you would have had you purchased the equipment from the start.
"I find that purchasing equipment is more economical for my business," says the founder and CEO of one San Francisco boutique PR firm. "I plan to keep equipment for the long-haul, so buying makes more sense for me."
She adds that most capital purchases for her business are not big-ticket items that require financing. For example, she recently purchased a laser printer, a desktop computer, and some office furniture. Because she had cash readily available, the one-time expenses did not significantly impact her company's bottom line. The ongoing expense of a lease, though, would alter her operating expenses.
Another disadvantage of leasing would be the commitment. Even if you close your business or decide to buy a piece of equipment, you're still responsible for meeting the lease terms. Some lessors will permit the sale of the equipment or transfer of the lease to another party (assuming they qualify), but that may require some legwork on your part.
Ultimately, the decision to lease or buy will depend upon:
- How expensive the equipment you need is.
- How much cash you have available to spend.
- How long you plan to keep the equipment.
If You Decide to Lease
Two common lease types are the operating lease and the finance lease. An operating lease offers terms that are shorter than the equipment's useful life, making them ideal for high-tech equipment you plan to upgrade regularly. A finance lease, on the other hand, tends to be longer, lasting most of the useful life of the equipment.
Here are some tips to help you get the most out of your lease:
- Use an online equipment lease calculator to find out how much the lease will cost you.
- Review your financing options. Vendors often offer their own financing, but you can also go through a leasing financier.
- Research lessors before you choose. If you don't have a recommendation from someone you trust, contact the Equipment Leasing and Finance Association, which offers a searchable directory.
- Ask about options for exchanging or upgrading equipment, changing the lease terms, or ending the lease early.
- Discuss your obligations as the lessee. (Are you responsible for maintenance costs and insurance on the equipment?)
- Consider purchasing the equipment when the lease term is over if it's for an item, such as a desk, that doesn't quickly become obsolete.