Lease Vs Buy

Does it make more sense to lease business equipment or buy business equipment? As we slowly and tentatively ease into what the talking heads on TV are calling an economic recovery, you may be thinking about upgrading that outdated processing equipment and getting a new machine that's better and faster. Perhaps you even see your backlog increasing again and you're realizing you have ridden your existing capacity until the wheels are falling off, and if you want to grow the business, you need some equipment. It might be wet process equipment, machine shop stuff, forklifts or new PCs for the office, and depending on what it is, your situation and plans, there are a several options to consider so that you can put the equipment in place and start using it, immediately.

Leasing equipment is generally a better option for manufacturers who have limited out-of-pocket capital and where business needs require upgrading equipment every few years. Office computers and copiers, for instance, are often leased strictly to avoid obsolescence every few years. Purchased equipment may be a better choice when the useful life of the equipment lasts more than five years. Interestingly enough, there are leasing programs available that end in equipment purchase at term that still minimize up front cash required. Each company situation is unique and you should make decisions on a case by case basis.

Leasing Advantages

The primary advantage of leasing is that it allows you to acquire assets with minimal initial expenditures. Because leasing rarely requires a downpayment, you can obtain and make use of the equipment you need without significantly affecting your cash flow. This frees up cash for operations or other investments. Another financial benefit of leasing, if you have a straight operating lease (read that equipment rental contract), is that your lease payments are generally 100% deductible on your corporate tax return in the year they are paid as an operational expense of the business. This effectively reduces the net cost of the lease and should be considered. Leases for manufacturing equipment are usually easier to obtain and have more flexible terms for buying equipment than do loans, and this can be a tremendous advantage if you have poor credit or need to negotiate a longer payment schedule to ease the burden on your monthly cash flow.

Leasing also addresses the problem of equipment obsolescence. If you secure machines with your lease that become technologically outdated within a few years, a lease passes that burden to the lessor, and gives you the freedom to lease newer, higher end equipment at the completion of the lease term. Similar to obsolescence, many manufacturers are awarded multi-year contracts by industry or government (DOD, etc.). A typical lease relieves the manufacturer of the burden of owning equipment he will no longer use upon completion of the contract. If the contract is renewed or extended, so may be the lease, or alternate options become available. In fact, a lease is a nice option for any situation where the long term viability of a current business opportunity is uncertain, such as trial entry into new markets, products, etc. Translation: maximum flexibility.

A straight equipment operating lease means you don't own the equipment, you are paying for its use over the course of the lease. You can relate to automobile leasing, and at the completion of the lease, just as with cars, you have an option to buy the equipment at a fixed price, usually the fair market value.

As I hinted at earlier, there are also less traditional leases with higher payment terms that result in a buyout at 10% of purchase or $1, and this is more akin to traditional financing, except that there are still low down payments and flexible terms. For tax purposes, these leases are treated as capital purchases and enjoy the tax benefits of ownership (such as section 179 advanced depreciation rules, see Buying).

Leasing Disadvantages

Leasing equipment has two primary disadvantages: overall cost and lack of ownership. Leasing a piece of equipment is almost always more expensive over the long haul than purchasing it outright. For instance, a 3-year lease on computer equipment worth $4000, at a standard rate of $40/$1000 price, will cost you a total of $5760, whereas purchasing it outright costs $4000. In addition to the higher cost, you will have built no equity in the computers on a FMV (Fair Market Value) lease. Unless the equipment has