Lease vs. Buy, Which Is Better?
Q: What are the advantages of leasing equipment for a company, instead of buying or financing. Additionally, is leasing possible for a start-up or is it better for a company that is already in operation?
A: Leasing can make sense when cash is tight, as many businesses are experiencing right now. You don’t have the big upfront costs you’d face if you purchased the equipment outright or put money down on a financing loan. You generally just have a flat monthly payment over the lease term, with perhaps a small deposit.
There are other benefits to leasing, too, such as every few years, or whenever the lease term ends, you can upgrade your equipment and get the latest gadgets and frills. What’s more, some lease agreements cover certain repairs, upgrades and maintenance, so you may not face the same out-of-pocket expenses and time hassles you’d have with ownership. It really comes down to analyzing the costs of the lease versus buying it and then carefully reading over what the lease terms would include.
Many businesses opt to lease technologies like computers and copiers, because these items depreciate in value so fast, and then the businesses needn’t worry about all the upkeep and disposal costs. They just turn the equipment back into the leasing company.
Many lease agreements also come with the option to buy the equipment once the lease term ends.
That said, leasing isn’t always the right decision. Start-ups without steady or generous cash flow may do well to lease in order to preserve cash. But there are also disadvantages to consider. Leasing tends to be more expensive than buying equipment over several years. And once your lease is up, you don’t own anything — unless there’s an option to buy the equipment or you entered into a lease-to-buy arrangement.
Some online calculators can help you compare the overall costs of leasing versus purchasing. Check out the “Equipment Buy Vs. Lease” calculator on CCH’s Web site, at http://www.finance.cch.com/tools/calcs.asp. Look under “Business Calculators.”
Also, there are tax incentives that may make purchasing equipment more attractive right now.
The bailout package recently passed by Congress extends a provision allowing businesses to deduct in full up to $250,000 in capital expenses in the year of purchase, rather than having to spread the deduction over several years. You only get to deduct your monthly payments when you lease.
Before you decide to lease, read over any lease agreement carefully. Like with automobile leases, there can be some hidden penalties or stipulations. Some may charge a hefty penalty if you break the lease, or may require you to pay for regular maintenance of the leased equipment.
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