Leasing or Buying: Which is Best for your Business?

Diane · Joined: 07 May 2007 Posts: 8 Karma: 0 (0)

Today, almost anything can be leased. Cars, computers, stereo equipment and big screen televisions all come with an option to lease. Although the decision to lease or buy isn’t an easy one, when it concerns the purchase of equipment for a business the stakes are even higher. Equipment is overhead – an investment. Will leasing lower taxes? Will buying lower the payments? Which is better for a growing business? These are some questions to address before signing on the dotted line.

Every business varies which makes the decision to lease or buy an individual one. A tax adviser or accountant can evaluate business strategies as well as analyze critical information such as a cash-flow statement, operating statement and balance sheet.

Option number one: leasing:
An appropriate time to lease is in an expansion year. While a high-profit year favors buying, leasing offers flexibility and reduced risk when a business is in a growth phase. The short-term nature of a lease doesn’t lock a business into one piece of equipment, which is advantageous when the business is growing.

Another advantage of leasing is its liquidity. The lease contract should be structured with a purchase option at the conclusion of the contract that accurately reflects the equipment’s market value. This results in lower up-front costs, lower payments and better cash flow. The contract also allows the lessee to fix their payments and deduct them from their taxes. This can be done when buying equipment as well.

Before signing a lease, the contract should be reviewed carefully. The most important contract item is the length of the lease. Most leases are in the range of two to five years, with three being the most common. Interest rates also need to be considered. Rates can vary widely, making it essential to compare. Insurance coverage is another important item to consider. Is the equipment insured under the individual or the business? Finally, don’t enter into a lease that doesn’t accurately reflect the value of the equipment. This can result in the loss of tax advantages.

Option number two: Buying:
Obviously, the primary benefit of buying is ownership. When the term is up, the equipment is owned free and clear, as opposed to signing a new contract and continuing payments. As mentioned earlier, leasing offers some tax breaks, but when purchasing equipment depreciation, insurance, repairs, taxes and interest can be deducted. Tax issues aside, if ownership is the ultimate goal, buying is the way to go because equipment will cost less in total when purchased up front, rather than at the end of a contract.

Another problem that presents itself at the end of a leasing contract is excess wear. Most leases limit wear to the equipment during the lease term. Often, people would rather buy than pay extra charges for exceeding wear limits. However, excessive wear does lower the equipment’s resale value.

Unfortunately, the leasing versus buying debate doesn’t have an easy answer, but knowing the pros and cons of each will help in the decision-making process.

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