Purchasing vs. Leasing Business Equipment

Learn about the benefits and drawbacks of each option before deciding whether to lease or buy.

Is it better to lease or buy equipment for your company? The answer is contingent on your circumstances. Leasing equipment can be a suitable alternative for entrepreneurs with limited resources or who require equipment that must be changed every few years, but purchasing equipment is a preferable option for established enterprises or equipment with a lengthy useful life.

However, because each company is different, the decision to buy or lease business equipment must be decided on an individual basis. Let's have a look at both of them.

Leasing Equipment

Leasing business equipment and tools preserves capital and provides flexibility but may cost you more in the long run.

Advantages of Leasing Equipment

There is a lower initial investment. The main benefit of leasing company equipment is that it allows you to purchase assets for a low upfront cost. You can get the things you need without disrupting your cash flow because equipment leases rarely require a down payment.

Deductible on your taxes. Lease payments are frequently deductible as business expenses on your tax return, lowering your lease's net cost.

Terms that are adaptable. Equipment leases are typically easier to secure and offer more flexible terms than equipment loans. If you have weak credit or need to arrange a lengthier payment plan to minimize your costs, this might be a considerable benefit.

It is less difficult to upgrade equipment. Businesses can use leasing to address the issue of obsolescence. If you utilize your lease to obtain products that are likely to become obsolete in a short period of time, such as computers or other high-tech equipment, the lessor bears the cost of obsolescence. After your lease expires, you are able to lease new, higher-end equipment.

Disadvantages of Leasing Equipment

The entire expense is higher. Almost often, leasing an item is more expensive than buying it. A three-year lease on a $4,000 computer, for example, would cost $5,760 at a normal rate of $40 per $1,000 each month. You would have paid only $4,000 if you had purchased it entirely.

It isn't yours. You don't accumulate equity in the machinery. This lack of ownership is a big drawback unless the equipment has become obsolete by the conclusion of the lease.

Payment for the entire lease term is required. Even if you cease using the equipment, you must make payments for the whole lease period. If your business changes directions and the equipment you leased becomes obsolete, certain leases provide you the opportunity to quit the lease, although substantial early termination fees always apply.

Buying Equipment

Ownership and tax breaks make buying business equipment appealing, but high initial costs mean this option isn't for everyone.

Advantages of Buying Equipment
Ownership. The most obvious benefit of purchasing company equipment is that you become the owner of it. This is especially true for items like office furniture or farm machinery that have a long functional life and are unlikely to become technologically obsolete in the near future.

Incentives are tax breaks. The Internal Revenue Code's Section 179 permits you to deduct the full cost of some newly purchased assets in the first year. You can deduct up to $500,000 of equipment in 2012 and 2013 (subject to a phase-out if you put more than $2,000,000 in service in any one year). For instance, if you are in the 25% tax rate and spend $100,000 on company equipment this year, your net cost is only $75,000.

Depreciation deductions are possible. Although not all equipment acquisitions are qualified for Section 179 treatment, depreciation discounts can help you save money on practically any business asset. (Real estate, inventory purchased for resale, and property purchased from a close relative are examples of assets that do not qualify for the Section 179 deduction.)

Disadvantages of Buying Equipment
Initial costs are higher. Some consumers may not be able to afford to buy business equipment because the initial investment is too large. Even if you plan to borrow the money and pay it back in monthly installments, most banks need a 20% down payment. Borrowing money can tie up credit lines, and lenders may impose limits on your future financial operations in order to ensure that you can return the loan.

Having to work with outdated equipment. Ownership is likely the most significant benefit of purchasing company equipment, but it may also be a downside. You face the risk of becoming technologically obsolete if you buy high-tech equipment, and you may be obliged to invest in new equipment much sooner than you expected. Certain types of business equipment have little resale value. For example, a $5,000 computer system now may be worth only $1,000 or less three years from now.

Should You Buy or Lease?
Try to calculate the estimated net cost of a piece of company equipment before selecting whether to buy or lease it. When calculating this figure, remember to account for tax breaks and resale value. Consider other intangibles such as the risk that the product may become obsolete (if you are considering purchase) or that your need for the product will expire before the lease expires after you've determined which option is more cost-effective (if you are considering leasing).

​