There are many factors to consider when you're acquiring equipment, buildings or automobiles. And one of the primary ones is, should you lease or should you buy? Both options have advantages and disadvantages based on your particular business situation.
To help you make the best decision in any given situation, you'll want to ask yourself the following questions:
How long do you plan to keep the asset? If you're only planning to keep it for the short term, you may find that leasing is a better alternative than buying it and trying to resell it when you no longer need it. You'll want to find out if there's a buyout option at the end of the lease if you decide you want to keep the asset after the original lease is over.
Is new or used equipment the best fit for your needs? Do you need new equipment, or can you utilize used equipment? Used equipment is often available at a lower cost, and while you'll save money on the purchase price, you may not have the option to lease it. New equipment, on the other hand, is often available for either buying or leasing.
One important task you'll want to undertake is to analyze the cost/benefit of new vs. used equipment, especially if you're just starting out. Investing in a lot of new equipment when you're just getting started can place an undue burden on your cash flow and finances. It might be better to start small and increase your capital acquisitions as you increase your profits and can support the growth.
How frequently does technology change with this asset? For assets that become outdated rapidly, it may be wiser to take on a short leases so you can always have the most recent technology, especially if technology is critical to your business. If your company isn't reliant on the latest technology, you'll often find it more cost effective to update you technology products a little less frequently, such as every three years.
What are my financing options for purchasing vs. leasing? Purchasing tends to require a higher monetary outlay initially in addition to having to finance your purchase through a lender. Depending on your situation, this may not be a viable option if you don't have a large enough cash reserve. Leasing generally requires less cash down, and the monthly payments are often smaller.
What are the tax benefits of buying vs. leasing? It's critical that you consider all related tax ramifications for both options as they relate to your particular business situation. There's usually a tax benefit associated with leasing where you get to deduct the full lease payment immediately. You should be sure to consult with your tax professional because each type of lease has a different accounting for tax purposes as to how much you get to deduct as an expense on your profit/loss statement.
When it comes to purchasing and financing the asset, you only get to deduct the interest portion as an expense. The principal amount that you're paying on the loan isn't considered a taxable deduction on your profit/loss Statement-it's considered a reduction of your loan liability.
Leasing and buying both offer advantages to companies. The key to making the right decision is understanding exactly what your company's needs are and the purpose of the asset. Answering the questions above will help ensure that you're making the best choice for your situation.