Leasing
The Basics
Typically, when you lease a business asset:
- A finance/leasing company buys the asset.
- You make monthly payments for a specified period of time - basically ‘rent’ for using the asset.
- You return the asset to the financing company at the end of the lease period.
- You do not own the asset, unless you obtain an agreement that allows you to buy it at the end of the lease period.
The Advantages
Leasing offers many benefits to businesses, including:
- Cash: When you lease, you’re able to spread out the cost of a business asset into stable monthly payments. Buying outright requires a large day-one cash outlay.
- Flexibility: Let’s say you lease a piece of equipment today, but your technology needs change six months later. Many leases will allow you to upgrade that equipment with minimal or no additional costs. When you buy it – it’s yours.
- Tax Advantage: You can write-off or “expense” most lease payments in the year paid. Conversely, buying can (major equipment, infrastructure) require you to capitalize the purchase and depreciate the cost over several years.
- Built–In Maintenance: Many industrial and office equipment leases come with ongoing maintenance, software upgrades, customer training, and support. When you buy, you have to become expert on whatever it is you just purchased – or spend a lot of money hiring someone who is.
- More initial bang for your buck: While you may spend more in the long-term, leasing allows you to get a lot more today for a lot less.
Depending on your type of business and the asset you currently need, leasing can be a convenient and smart way to pay for it.
Buying
The Basics
When you buy a business asset with existing capital:
- You spend your cash on day-one to pay for an item
- You own the asset outright
You may also choose to buy business assets with capital obtained via a bank loan. If so:
- Your day-one capital outlay will be lower, but you’ll need a specified amount of cash each month to pay back the loan
- You own the asset, but the bank has a lien against it to secure the loan proceeds you used to make the purchase
- You’ll pay interest on the money you borrowed.
The Advantages
Buying an asset outright can be a great option if you have the cash-on-hand or if it’s imperative you own the asset. Advantages include:
- Lower overhead: When you lease OR when you buy with a loan, you’ve got monthly payments to contend with regardless of your income. However, if you buy business assets only when you’ve got the cash to do so, your fixed expenses will be lower.
- Lower total cost: In many cases, the life-time cost of business assets is lower when you buy versus when you lease. For example, a conference room table might cost $750 to buy today and you know you’ll have it for at least 5 years – making your annual cost $150. Conversely, you could lease that same table for 5 years at $18 per month. Annual cost? $216.
- You own something: When you buy something outright, it shows up in your financials as an asset, whereas when you lease, you’ve just got a liability (even though it doesn’t necessarily appear on your balance sheet) with nothing to show for it. When you buy using proceeds from a loan, you’ve got both an asset and liability on day one, but at the end of the loan period, you’ll likely still have a valuable asset on your books.
- Tax advantage: Many times, you can expense a large amount for assets you purchase every year until they’re fully depreciated. If your profitability is strong and you expect to have a good year (or years), buying can offer higher write-offs than leasing.
Depending on your type of business and the asset you currently need, leasing can be a convenient and smart way to pay for it.
Which one is best?
The short answer: It really depends. It depends on what type of business you run, whether you’re in a period of rapid growth, and what your long-term planning looks like. And that’s just the start of why the decision to buy or lease is not as clear as you might think. The following tips provide good, rule-of-thumb guidance.
- Don’t buy or lease more than you need. Don’t build out office space for 50 when your reasonable projections can only support 20. Focus on what you need right now and can conservatively forecast for the future.
- Buy small. Lease big. Unless it’s a must for your industry or long term plans – or if the value of the asset will appreciate, don’t buy a major piece of equipment or other big-ticket item. Instead, find a lease that works for you. Likewise, signing a lease for a printer or basic office furniture doesn’t make a lot of sense - especially if those items only cost a few hundred dollars.
- Uncertain future? Consider a short term lease. Some standard leases can be difficult to get out of should your needs change or you run into a rough spot.
- Meet with your banker. In many cases, your bank (and likely your banker) has been with you since the very beginning and has a very keen understanding of your company’s financials. Seek your banker’s advice as to which option might be best for you.
- Don’t forget your tax advisor. Every buy and every lease will carry tax implications. Before you decide which is best for you, meet with your CPA or tax advisor to understand the effect each might have on your business.
