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Business Assets: Buy vs. Lease

From RBC Bank


RALEIGH, N.C. – April 7, 2010 – Buy Small. Lease Big. That’s the conventional wisdom for managing business assets ranging from office space to office furniture. But the decision about buying vs. leasing likely is a little more nuanced for most business owners and managers than the conventional wisdom makes it sound. Business owners need to weigh their options carefully. Both leasing and buying offer distinct advantages:

Leasing Advantages:

  • Spreads the cost into stable monthly payments
  • Stay current on existing loan payments
  • Often provides flexibility to upgrade at minimal cost
  • Frequently delivers built-in maintenance and service plans
  • Creates more initial bang for your buck
  • Offers typically lower payments, preserving capital and credit for growth
  • Creates possible tax advantages for lease payments

Buying:

  • Generally provides lower life-time cost
  • Puts idle cash on hand to use to acquire asset immediately
  • Adds assets to your balance sheet
  • Offers tax advantages until asset fully depreciates

Both approaches provide advantages, so in weighing the choices the business owner should consider three questions:

  1. How does leasing work?

    The leasing company owns the item, and your business is essentially renting it for the period of the lease – which may range from several months to several years. Your business pays a fixed amount until the term of the lease is up, at which time the leased item is returned to the leasing company or it may be offered to your business for outright purchase.

  2. What are the pros and cons of leasing and buying?

    The answer is that leasing is often the preferred choice when a business desires flexibility more than it needs overall cost savings. As the chart below demonstrates, leasing has fixed fees, often includes maintenance and may allow you to upgrade in the middle of the lease period if your business needs grow. Buying meanwhile puts idle cash to work and fixes costs with the set purchase price for the asset.

    Leasing Buying
    Cash Outlay Some All
    Monthly Payments Yes No
    Flexibility Lots None
    Tax Advantages Yes Yes
    Maintenance Sometimes Included For a fee
    Total Cost Higher Lower
    Classification Liability Asset

  3. Is there another choice?

    Yes. A bank loan can offer a business the benefits of the set payments of a lease as well as several of the benefits of buying with cash. Purchasing an asset with a bank loan gives a business:

    • Monthly repayment
    • Ownership (with a bank lien)
    • Interest owed on money borrowed
    • Asset and liability/

    As with leasing, the bank loan requires a minimal amount of capital outlay at the outset. And, as with leasing, a bank loan provides the business with predictable monthly payments. Unlike with leasing, however, with a bank loan the business eventually will own the asset when the term of the loan is completed and all the payments are made.

    So, before you decide to buy, lease or borrow to add an important asset to your business, talk with your banker about the right choice for your balance sheet and your business’s long-term goals.

    This article is provided by RBC Bank. The information included in this article is not intended to be used as the primary basis for making financial decisions. RBC Bank does not provide tax or legal advice. Please consult your own financial, tax or legal advisor.

    About RBC Bank
    RBC Bank, headquartered in Raleigh, N.C., offers a wide range of financial services and advice to individuals, businesses and public institutions throughout the Southeast. RBC Bank’s network includes more than 420 full-service banking centers in six states (Alabama, Florida, Georgia, North Carolina, South Carolina and Virginia), an extensive ATM network and telephone and online banking. RBC Bank is the 38th largest U.S. bank by consolidated assets, according to SNL Financial’s List of the Nation’s 50 Largest Banks, September 2, 2009. RBC Bank is a wholly-owned subsidiary of Royal Bank of Canada (RBC) (RY on the TSX and NYSE), Canada's largest and most stable bank as measured by assets and market capitalization. In August 2009, Global Finance Magazine ranked RBC as the safest bank in the Western Hemisphere. RBC is also one of the world's financial, social and environmental corporate leaders, having appeared on the Dow Jones Sustainability World Index every year since its creation in 1999. Additional information about RBC Bank may be found at www.rbcbankusa.com.

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    For more information:
    Dorsey Landis
    RBC Bank/(919) 788-6272
    Dorsey.Landis@rbc.com