July 22, 2018

Should You Lease or Buy Equipment for Your Business?

Can’t decide whether to lease or buy the equipment you need for your small business? Don’t worry, asking yourself these six questions will help you decide…

It doesn’t matter what line of work you’re in or even whether you are a new or growing business, equipment is crucial for business success.

Sure, some businesses will have more substantial equipment needs than others (think of a writer who just needs a laptop vs a photographer or videographer who has more complex equipment needs). But in the end, every business needs equipment.

While this need for equipment is universal, how we go about acquiring it differs. Indeed, when obtaining new equipment, we have a choice whether to lease or buy.

Should You Lease or Buy?

Imagine the scenario of a business owner who runs a plumbing business: Six months after launching his business he lands an exciting contract. The only catch is that the deal requires him to get his hands on a specialized piece of equipment that he usually doesn’t use, that costs a bit of money.

Because it’s a massive opportunity, he decides to do everything in his power to get his hands on this equipment. He eventually settles on a product and decides leasing is the best option.

In this post, we share that process by looking at 6 key questions you should ask yourself when choosing between leasing and buying.

#1: How Often Will I Use the Equipment?

Will it be for a once off project or will you use it again and again?  If you’re using the equipment for a once off project, then leasing the equipment for a short time makes perfect sense.  This may not be the case if you intend to use the equipment more often, and therefore buying the equipment might make more sense.

#2: How Much Money Do I Have?

Even if you plan to use the equipment often and decide that purchasing it is better, you may find that you don’t have enough cash available. In these instances, leasing may be the wiser option, especially if you urgently need that equipment.

Your decision to lease or buy shouldn’t only be driven by your current financial situation, but also your ability to make future payments.

For example, let’s say that you have $1,000 in your bank account which is enough to buy the equipment that costs $800. You decide to go ahead with that purchase, only to discover that at the end of the month you don’t have enough cash to pay rent and cover your other bills.

The scenario shows you the importance of thinking ahead to make sure you have enough cash to meet all your financial obligations.

If you foresee that making payments will be a struggle, you may want to hold off on that purchase and wait until you can afford it. And, if holding off isn’t an option, then go with the lease (with the understanding that the rental will cost you more in the long run).

Of course, there is another option here and that would be to finance the equipment purchase, assuming that you can get the finance for the equipment and its make sense from a cash flow perspective.

#3: Does It Have to Be New?

Let’s assume you’ve conducted a financial review and discovered that you don’t have enough money to buy the equipment and also cover your short-term expenses.

Let’s also assume that you urgently need that equipment. While leasing may seem like your only option, if you don’t have enough money for something new, you may want to purchase it second-hand.

A word of caution: Buying used equipment comes with risks. You often don’t have the same warranties or protection that you have when purchasing it new, and if there are any failures, you’ll foot the bill to fix it (especially if there’s no warranty).

#4: What Are the Tax Benefits?

Leasing is a business expense and is, in most cases, 100% tax deductible. With leasing, you can usually deduct the full lease payment upfront.

Purchasing equipment also has tax benefits, and while these incentives are more significant for purchases, they do have their limits, i.e for a small business, there is a $20,000 instant asset deduction until 30 June 2019.  If your asset is more than this then you only get a tax deduction over time as you write off a portion as depreciation each year.

#5: How Quickly Does the Technology Change?

Technology can quickly become outdated and depreciates with time. So, you may want to opt for a lease to ensure that you always have the latest technology available (remember that with a lease, the onus is on the company you’re leasing from to ensure that technology is maintained and up-to-date).

If having the latest technology isn’t essential for your business, then buying the equipment instead may be the better option (after considering questions #1, #2 & #6).

#6: What Are the Risks?

Many business owners prefer to buy equipment, so they don’t have to worry about damaging what they don’t own.

The downside of this, of course, is that you either have to pay for insurance because if the equipment does get damaged, you have to replace it, or carry the risk yourself.

Conclusion

There’s no denying that equipment is essential for the success of any business. Of course, how we go about acquiring this equipment differs from business to business.

You can choose between leasing and buying. Which is better for your business, is entirely subjective and depends on you and your financial situation.

So, to help you decide, ask yourself the six critical questions outlined in this post.

What do you prefer? Leasing or buying?

Filed Under: Accounting, Growth, Optimising Processes, Tax

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