Once you’ve determined all the assets you need for your business, you can decide whether you should buy or lease them.
Leasing can be a good option if you need to quickly get a lot of equipment, or if the equipment you need is very expensive. Commercial space can also be leased, so you can rent a place to run your business. In some cases, leasing can actually be less expensive than purchasing with a high-interest loan
Leasing has benefits:
Needs less cash or credit up front Short-term leases let you test out the equipment Maintenance is sometimes included at no extra cost Lease payments for business assets are typically tax deductible Leasing also has disadvantages:
The lifetime cost is normally higher than buying Replacing it when the lease is up could be expensive Depreciation of leased assets typically isn’t tax deductible Every lease can be structured differently, so look into the details of your offer to make sure you’re getting something that works for you.
Confirm the details of a lease There are two general kinds of leases: operating leases and capital leases. Since the accounting treatment is different, the kind of lease you use can have a significant impact on your business taxes.
Operating leases work like a traditional rental. You don’t own the asset, so it doesn’t get added to your balance sheet. Payments are considered operational expenses. You generally don’t take on maintenance, risk, or tax obligations for the asset.
Capital leases work more like a loan. For accounting purposes, you own the asset. It does get added to your balance sheet, and you can claim depreciation and interest expenses. You also take on all maintenance, risk, and tax obligations for the asset.
There are other factors to look at, too. Leases sometimes have buyout options that let you fully purchase the asset at the end of the lease. The length of a lease can vary, and shorter leases typically have higher monthly payments. If you want to leave a lease early, you could face steep early-termination penalties.
You might want to ask an attorney to review a lease with you before signing, especially if any of the terms or conditions are unclear.
Buying equipment can be a good option if you have enough cash or credit available and you’re confident you’ll be using the assets for a long time.
Buying has benefits:
You can claim depreciation on your taxes The lifetime cost to buy is usually less than leasing You can count it as an asset on your balance sheet Buying also has disadvantages:
Needs more cash or credit up front Less opportunity to “test out” the asset You could be fully liable for maintenance and replacement Buy with cash or credit If you buy your assets with cash, you’ll own it in full right away. But it also means you’ll have less cash available to cover operating expenses. Make sure you’ve done your accounting homework, and that you can actually afford to pay with cash.
Loans can give you some of the same benefits of leases by distributing the total cost over a longer period. However, you’ll pay more in fees and interest than buying outright with cash.
You might be able to leverage lines of credit with your bank or look for other sources to get more funding for your business.
If you need more help deciding whether to buy or lease equipment, talk to one of our small business counselors today