What are the risks associated with equipment leasing versus buying? What’s the better choice for a new business?
All companies, at some point or another, have to take chances in order to be successful; however, jumping in blind is never the way to go. As a business, if you do your homework and take some calculated risks, it should work out in your favor in the long run.
The trick is calculating and examining every option, so you can decide which choices are the best for your business overall, both in the long run and short run. This varies from business to business, but most companies have to weigh everything as far as how their finances are managed overall.
Many companies have to heavily manage their finances when it comes to equipment, because their business comprises mostly of hardware, like fitness centers, farms, restaurants, and delivery trucks. That’s what puts them in a situation; they want the best equipment they can get because good equipment means a better start up, but good equipment also costs much more.
Businesses will often compare the risks associated with equipment leasing to the benefits and downsides of purchasing hardware to see which avenue is best for their company overall.
How does Purchasing work in the Short Term and Long Term?
Purchasing is useful in the short term because of ownership; you get to own all of the business and the hardware that makes it, and you get funds to help you purchase the equipment initially. However, you do run into instances where purchases are a major liability, notably when you have to repair your equipment or when your hardware becomes outdated.
Most equipment can be repaired at a fairly high rate, but there comes a point where it’s just wiser financially to replace it, meaning you have to spend all that money again to get the same hardware, and this happens fairly quickly looking at a business timeline. To make matters trickier, with technological advances, there’s a new model of something every year or two, and if your hardware is outdated enough, it could mean you’re falling behind compared to your competition, who could be acquiring the new hardware.
Again, you’d have to replace the hardware, spending a good deal of money to do so, which is fairly difficult for newer businesses to handle, especially when their equipment rates are so steep. In addition, many businesses can’t afford to even buy the equipment in the first place, meaning they have to take out a bank loan to get the hardware.
Paying that off with interest is tough enough, but if you still haven’t paid off the loan and end up having to replace hardware, you’re just digging yourself deeper into the hole financially.
Risks Associated with Equipment Leasing
Leasing counteracts the disadvantages of purchasing equipment, because you don’t have to worry about high rates or replacement costs. Leasing essentially takes out the responsibility of full consequences for equipment maintenance, giving you the freedom to start your business the way you want.
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With leasing, you get hardware loaned to you for an extended period of time, and during that contract period you pay a low flat monthly rate. During the lease, as long as you pay the rates every month you get to keep the hardware, and if your hardware falls into disrepair you can get it fixed.
There are two main risks associated with equipment leasing; but both are fairly manageable if you know what you’re doing. First off, if you’re a new business owner, you do put your credit on the line for the lease to work.
However, this guarantees that you have a reasonable place to lease in the future, and if you follow the lease, you should have no problems. That’s where the second risk comes into play: you need to know that you’re going to be able to stick to the lease throughout the duration of the contract, or else you’ll face the punishment of a high cancellation fee.
Again, this is manageable because a lease is a contract you sign, and as long as you examine the factors and get the best lease possible, you should have no problem. To learn more about the risks associated with equipment leasing and purchasing, click here.