When you’re starting a business, it can be tempting to lease rather than buy any expensive office or warehouse equipment you need in order to conserve cash flow. However, this may or may not be your best option.
Whether it’s better to buy or lease equipment for your business will depend on a number of factors, including your cash reserves, the type of equipment you need, whether that equipment will hold its value over time, and how long you plan to have the item in service.
Learn the pros and cons of leasing vs buying equipment, tools, computers, and vehicles for your company.
Leasing vs Buying Equipment
Leasing business equipment can help preserve capital and provide flexibility, which can be important when you are starting a small business. However, leasing could end up costing you more in the long run. Let’s break it down and compare.
| Leasing Equipment | Buying Equipment |
|---|---|
| Keeps cash on hand | Costs may be tax-deductible |
| Expenses may be tax deductible | If equipment holds its value over time, buying can save you money in the long run |
| Equipment is always new and up to date | You can end up owning old or outdated equipment |
| You may be obligated to make payments for the entire lease period even if you stop using the equipment | Can sell the equipment when you’re done with it |
| Can’t modify or change the equipment in any way | Can modify the equipment to meet your needs |
| May get free repairs | Must pay for any maintenance costs out of pocket |
Pros and Cons of Leasing Equipment
Leasing equipment has a number of advantages over purchasing. Here are some to consider.
• Down payments are usually lower than financing (and sometimes no down payment is required)
• Terms are often flexible (e.g., can buy out lease)
• Allows you to test out equipment before you commit to it
• Maintenance and repair costs are usually free
• Monthly lease payments may be tax deductible
• Can be easier to get than a loan if you don’t have good credit
• Easier to upgrade after your lease expires
But there are also a number of downsides to leasing vs buying equipment. These include:
• You don’t own the item while leasing it
• Will likely have a higher overall cost
• Depreciation is not tax-deductible
• You’re obligated to stick with the lease even if you no longer need/use the equipment
• Termination fees for breaking the lease contract
Pros and Cons of Purchasing Equipment
There are also advantages and disadvantages of buying equipment. Here’s a look at some of the benefits of purchasing business equipment:
• You own the equipment
• Lifetime cost is usually less than leasing
• Counts as an asset on your balance sheet
• Can likely claim depreciation on your taxes
• Free to use equipment however you choose
• Can sell the equipment after using it
Purchasing equipment also has some disadvantages. Here are some to consider:
• Need more cash or credit up front
• Can’t always test out the equipment before purchasing
• You are liable for maintenance and replacements
• May get stuck with old and outdated equipment
• If you finance it, will increase liabilities on the balance sheet, which could prevent you from borrowing more money
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What Types of Business Equipment Can You Lease?
Just about any type of equipment that is pivotal to a business’s operation can be leased. This includes but is not limited to:
• Audio equipment
• Communication equipment
• Company vehicles
• Computer hardware
• Computer software
• Construction equipment
• Digital signage
• Fitness equipment
• HVAC systems
• Lighting systems
• Manufacturing equipment
• Medical equipment
• Office furniture
• Office equipment
• Copiers and printers
• Fax machines/scanners
• Point-of-sale systems
• Security systems
• Call center systems
• Wireless point-to-point systems
• Video surveillance
• Warehouse equipment
Pros and Cons of Leasing Computers
Whether business owners should lease vs. buy computers is a decision that ultimately comes down to the following pros and cons:
| Pros of Leasing Computers | Cons of Leasing Computers |
|---|---|
| Fixed monthly payments that are easy to budget for | Can end up being more expensive over time that purchasing computers outright |
| Hardware will always be up to date | Depending on the company, the leasing agreement may come with complicated terms — including what you can and cannot install on the computer |
| Depending on the leasing agreement, fixes and repairs may be taken care of for free by a certified technician | There may be penalties involved if the lease agreement is terminated early |
The biggest argument in favor of computer leasing for small business owners may be that the hardware is always up-to-date. A lease may allow you to stay current on the latest technology without having to repurchase every couple of years. This can help small businesses keep up with the technological curve.
If your tech needs are modest, however, and you can comfortably use the same gear for longer than five years, it may make more sense to simply buy the equipment you need.
Pros and Cons of Leasing Business Vehicles
To lease vs. purchase a business vehicle is also a debate for many business owners. When making that decision, it can help to consider the following:
| Pros of Leasing Business Vehicles | Cons of Leasing Business Vehicles |
|---|---|
| Down payments for leased cars may be lower than for purchased cars | You’re not building up any equity in the vehicle with your monthly payments |
| Monthly lease payments are typically lower than monthly auto loan payments | Can’t sell the car or trade it in to reduce the cost of your next vehicle |
| Your car will always be new and you’re not dealing with a vehicle’s value depreciating | Normally cannot make any modifications to the car |
| Repairs and maintenance may be covered | Must have a strong credit score to get a good leasing agreement |
| May afford you more tax write-offs than a loan | Have to pay certain fees that don’t come with a loan (such as an acquisition fee) |
| You’ll never owe more than the actual value of the car | Penalties for exiting a leasing agreement can be high |
Leasing a car can have many advantages for business owners, including a potentially higher write-off on your taxes and lower monthly costs.
In terms of the long-term financial impact, however, leases can be less attractive. Since you don’t build equity and typically have to pay fees that don’t come with a loan (such as an acquisition, or lease initiation, fee), it could be cheaper overall to buy a car and hold onto it for as long as possible. Vehicle refinancing can provide relief down the road.
Buying can also make sense if you plan to do any customization to the car, since altering the car is not typically allowed with a lease.
If you think buying might be the way to go but want to conserve capital, you may want to look into getting a small business auto loan, which is a type of financing tailored specifically for business owners.
Pros and Cons of Leasing Warehouse Equipment
Unlike computers, warehouse equipment tends to age pretty well, so there’s a lot to consider when deciding whether to purchase vs lease your warehouse equipment.
| Pros of Leasing Warehouse Equipment | Cons of Leasing Warehouse Equipment |
|---|---|
| Little upfront cost, if any | You can end up spending more in the long run than if you had purchased the equipment |
| At the end of your leasing agreement, you may be able to purchase the equipment, return it, or lease it again | Warehouse equipment typically depreciates very little year to year, which makes financing equipment fairly low risk |
| May come with free repairs | Can’t sell the equipment |
| Agreement may allow you to trade up | Fines for breaking leasing agreement |
To make a decision about whether to lease or buy warehouse equipment, you may want to consider how long you are going to need it. If the asset is something you know you’re going to need for the next decade or so, paying cash or financing the purchase could make more sense than leasing.
What to Consider When Choosing Whether to Lease or Buy
If you’re unsure whether it’s better to lease or buy business equipment, asking yourself the following questions may help sway your decision.
How Much Cash Do You Have?
If you have extra capital sitting around and a strong cash flow, buying may be a better option than leasing. Paying for the item outright avoids having to get financing or enter into a lease agreement.
If, on the other hand, cash is somewhat tight, it could be better to lease the equipment, since this will allow you to keep what cash you have free for any unexpected expenses.
What Will the Equipment Be Used For?
Think about how you plan to use the equipment, and whether it will be for the short or long term. Certain assets wear out as you use them, while others can become outdated over time.
If the equipment is likely to be useful and functional for many years, you might be better off purchasing it. If, on the other hand, it’s likely to wear out or become outdated quickly, it could be wiser to lease.
Is Handling Equipment Maintenance Doable?
When you lease equipment, you typically don’t have to worry about maintenance and repairs, since this is usually covered by the leasing company. When you buy equipment, this becomes your responsibility.
When weighing whether to lease or buy, it can be a good idea to research the potential cost of maintaining the equipment and then consider whether or not you would be able to handle those expenses.
Is Your Business Structured for Growth?
Part of the decision over leasing vs. buying comes down to whether you’re primarily focused on business growth or on profits. If your focus is growth, you may want to hold off on this kind of capital expenditure and lease. You can then put this cash toward other assets that can help you grow your business.
If you’re looking to quickly increase profits, purchasing equipment may be the better route. Owning assets can lower your operating costs and increase the overall value of your company.
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Leasing vs Financing Business Equipment
Equipment leasing and equipment financing are two ways to acquire business equipment without paying for it in full at the outset. However, these two options are structured differently.
Equipment leasing is a long-term rental agreement. You pay the leasing company a monthly fee for the duration of the lease agreement, and have full use of the asset during that time. At the end of the lease, you return the equipment. You may also have the option to renew the lease or purchase the equipment at that time. A monthly lease payment may be lower than a monthly loan payment for the same asset.
Equipment financing or an equipment loan, on the other hand, involves borrowing money to purchase a piece of equipment. The lender offers up to 100% of the purchase price. The business then pays the lender a portion of the purchase price (plus interest) each month until it is fully paid off.
Once the loan is paid in full, the business owns the equipment. While monthly payments may be slightly higher for an equipment loan than for an equipment lease, at the end of the loan term, the business fully owns the equipment.
Here’s a quick look at the differences between an equipment lease vs. an equipment loan.
| Equipment Lease | Equipment Loan |
|---|---|
| Business pays a monthly flat fee to rent the equipment | Business pays a monthly loan fee to cover part of the purchase price plus interest |
| Monthly payment may be lower than a loan payment | Monthly payment may be higher than a loan payment |
| At end of lease, business must return the equipment (or renew lease or opt to purchase it) | At the end of the loan term, the business has full ownership of the equipment |
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4 Ways of Financing Business Equipment Purchases
If you’re thinking about financing your equipment purchase, you have a few different options to consider.
1. Small Business Loan
With a traditional term business loan, you borrow a lump sum and repay it (plus interest) in monthly installments over the term of the loan. You can use the funds from the loan for virtually any business expense, including purchasing equipment. Terms loans are available from banks, credit unions, and online lenders.
When applying for a small business loan, you will likely need to present information about your business, financial statements for you and your business (such as profit and loss statements, tax returns, and bank account statements), and also explain how you plan to use the loan.
2. Equipment Loan
Business equipment loans are specifically for equipment purchases. You can get an equipment loan from a traditional bank, an online lender, or an equipment financing and leasing company.
In some cases, you must make a down payment, typically of 10% to 20% of the purchase price. The lender then covers the rest of the cost of the equipment. Each month, you pay the lender a portion of the purchase price (plus interest) until you’ve paid for the item in full.
Because equipment loans are secured with the equipment you are purchasing (which lowers risk for the lender), approval and funding take place relatively quickly. Even startups are often able to qualify for equipment loans. There are also ways to get equipment financing with poor credit, such as offering additional collateral or increasing your down payment.
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3. Business Credit Cards
Another equipment financing option is to use a small business credit card. This may be especially appealing if you are able to get a card with a 0% introductory annual percentage rate (APR). These offers often last as long as 12 to 18 months. If you can pay off the equipment in that time, you’ll get interest-free financing. If you need more time, however, you may get hit with high interest costs. Business cards also tend to have lower credit limits than other types of equipment financing options.
4. Small Business Grants
Grants for small businesses provide free money for startups and existing businesses and, in some cases, may be used for purchasing business equipment.
Grants can come from federal, state, and local governments; nonprofit and community organizations; and for-profit companies. Many are designed to help business owners who have historically had trouble getting financing from banks and investors, such as women, military veterans, and members of minority groups.
The Takeaway
It can be wise to make lease vs. buy equipment decisions on a case-by-case basis. Leasing can be a good option for business owners who have limited capital or who need equipment that must be upgraded every few years, while purchasing equipment can be a better option for established businesses or for equipment that has a long usable life.
If you’re seeking financing for your business, SoFi can help. On SoFi’s marketplace, you can shop top providers today to access the capital you need. Find a personalized business financing option today in minutes.
FAQ
Is leasing or buying heavy equipment better?
It depends on what you’re buying, how long it will last/be useful to you, and how much cash you have on hand. Leasing has financial benefits, such as lower payments and not being saddled with an outdated piece of equipment. Buying, on the other hand, may be more affordable in the long run, and you’ll own an asset you can then sell.
For tax purposes, is it better to lease or buy business equipment?
Both have tax benefits. When you purchase equipment, you can typically write off the cost of that equipment over time (known as depreciation). If you finance an equipment purchase, the interest you pay on that loan can usually be deducted as a business expense. And, if you lease, you may be able to deduct your lease payments as a business expense. Other factors can impact your decision, too; consulting with a tax professional could be worthwhile.
How is purchasing different from leasing equipment?
When you buy equipment, you own it. If you take out a loan to buy it, you may need to pay a certain amount up front, then make monthly payments that include interest. When you lease equipment, you pay a monthly fee to use it for a certain period of time and then return the equipment, though in some cases, you may have the option to purchase it.
Photo credit: iStock/Jacob Wackerhausen
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