To buy or to lease? That is the important question you need to ask and answer before you sign any equipment lease committing yourself to monthly repayments.
There are many reasons why it is prudent to do a lease versus buying analysis before you make any commitment to lease. The truth is that there are many times when either option makes more sense than the other and only a careful analysis will enable you to make the best decision for you and your circumstances.
But first we must be clear in our minds about what leasing means. Buying your equipment outright is easy to understand but leasing is a tricky term for most folks.
Actually the best way to understand leasing is to look a little deeper at the difference between leasing and a loan. Admittedly in some ways leasing is just like taking out a loan. For instance when you lease you borrow the entire value of the equipment and there are also monthly interest payments just like in a loan situation. However the big difference comes in the amount that you pay back. With a loan what you repay will be based on the cost of the equipment while with a lease you only pay back the depreciation (decline in value) during the period when you are using the equipment.
Many people believe that leasing and renting is the same thing. This is NOT true. Leasing is also NOT renting because for instance rent is usually paid over a shorter duration of time amongst many other differences. Also a rental agreement will never have the option to purchase at the end of the contract.
Leasing is a special financial arrangement that leaves the customer with many options including purchasing the equipment in the end. Leasing has helped many businesses of all size acquire equipment they otherwise would not have been able to put their hands on.
How Long Will You Use It?
This is probably the most important question you need to ask yourself before making a decision on whether to buy or lease. If the duration you are going to be using the machine you want to lease is too long then you are better off purchasing it. Only a calculation will tell you for how long you would need to keep the equipment for an outright purchase to make sense.
Is There A Tax Advantage?
Your lease payments can be filed as business expenses in your tax returns. This means that you will be spending money that would not have gone into your pocket anyway and in some cases it can be a significant reason to lease rather than make an outright purchase. You will need to talk to your accountant to get the full details for your particular situation.
Computers And Tech Equipment
The problem with computers and tech equipment is that they tend to grow obsolete virtually overnight. This makes an outright purchase a very unwise decision that could leave you stuck with old technology that may reach the point where it does not even have technical support. Yet when you lease you are able to easily dump the obsolescence financial burden on the leasing company as you move on to enjoy the latest cutting edge technological leaps.
This is the biggest attraction to leasing tech equipment for most people as they are able to always enjoy the latest equipment.
How Much Cash Do You Have?
Let us assume that you have weighed both sides and have decided that purchasing the equipment rather than leasing it is best for you. You even have the cash on hand. Still there is one more very important consideration you will have to carefully weigh. Will the large cash expenditure cause you a serious cash flow problem in the not-too-distant future?
For this one you will need to work closely with your accountant and do some realistic cash flow projections. Not to mention that in today’s unpredictable world it is always prudent for a business to have cash put aside in the event of some unexpected setback.
In this case leasing would make much more sense than buying even if you have the cash. You pay little or nothing upfront and are able to access new equipment which could well be an important new profit center for your business.
Leasing also enables small businesses with limited cash resources to acquire sophisticated technology to keep up with their competitors without having to drain out their accounts.
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