When you need to make major, durable, business purchases, for equipment such as vehicles, IT infrastructure and even real estate, it can be difficult to decide between leasing or buying. Every business is different, and every business has different needs. Those needs can depend on where your company is on its financial journey, and that can dramatically affect the answer.
The Argument For Leasing
Leasing can protect your capital resources, and it can allow you to be more flexible. However, it can cost more in the long run.
The biggest advantage to leasing is that it can allow you to get what you need with a smaller amount upfront. Leases often don’t require a downpayment, so you can obtain needed equipment without decreasing your liquidity. Leases are easier to obtain than financing, and have more flexible terms than loan terms when financing equipment. This can help if your credit is less than perfect, or you need a longer payment plan. Leases can be deducted as a business expense on tax returns. This can help reduce the net cost of your lease.
Leasing is a good choice if you need to continuously update or upgrade equipment, especially technology.
Leasing equipment tends to be more expensive than buying it outright, in the long run. The leasing company needs to make their money back by reusing or selling off the equipment at the end of your lease term.
You are required to pay the entire lease period whether or not you use the equipment. Sometimes leases will have an option to cancel the lease early if your business runs into trouble or decides that the equipment is not needed, but early termination fees will apply.
The Argument for Buying
When you buy equipment for your business, you probably want something for the long term. The higher upfront costs of a loan are generally offset by lower overall costs over the length of the loan.
The biggest advantage of buying your equipment is that you own it. This is helpful when it has a long service life, and isn’t likely to become obsolete. A good example of this is farm machinery.
Under the Internal Revenue Code, you are allowed to deduct the costs of the purchased assets in the first year. This can help lower the initial cost of the purchase. You can also receive additional savings in the form of depreciation deductions.
Sometimes, an outright purchase may not be a good option simply because the initial cash outlay may be too high. Usually banks require a 20% downpayment.
When making the decision of whether to lease or buy, you have several factors to consider, including tax breaks, resale value, service lifetime, residual value, and a litany of other factors which can make the transaction more or less expensive.
How We Can Help
At Nexa1, we partner with a third party to offer low cost and flexible leasing options for your technology needs. Dreading that big technology refresh? Do you need to replace that 10 year old server, but want to keep the replacement off of your balance sheet? Contact us today.