Buy vs. Lease Equipment – Simple Question With Thoughtful Answers
Perhaps the most commonly asked question I’ve received over the years; is it better to buy vs. lease equipment? The answer is highly subjective. There really is no right or wrong answer. However, if you can answer a few short questions with certainty, together we can arrive at the best answer for your situation.
6 questions you need to ask yourself to determine the Buy Vs. Lease Equipment Question
- Can you easily afford for your business to purchase the equipment you need?
- Would you rather make a payment each month than use up front cash?
- Do you have another alternative for financing the equipment?
- How long have you been in business?
- Is you business Credit acceptable for leasing
- Do you understand the leasing ramifications?
- Do you and will you make you monthly payments on time?
Let’s break down each question posed above and consider how the individual answers affect the larger buy vs. lease equipment determination. So, lets look at the first question of affordability. If you cannot afford to purchase the equipment you need, you can skip straight down to number 3. Do you have an alternative to leasing for financing the equipment?
If no, then question 4 – length of time in business becomes important. The reason is this; if you’re a brand new business or perhaps a newly formed entity of a recently purchased business, the business will not likely qualify for a lease. Most, but not all leasing companies require at least one year in business with the entity (corporation, P.A., LLC, etc.) before they will approve your lease and take you as a customer. Some companies may require 3 years in business, yet others may accept less with a Personal Guaranty. Naturally Your business credit (5.) is analyzed in every case, but your personal credit will also come into play if your tenure in business is at or near the minimum requirement.
If you feel comfortable that your answers to 4. and 5. qualify you for a lease, consider your understand of leasing. The answer to number 6. should not be taken lightly. A lease is a contract. Like any contract, you agree to accept certain obligations in exchange for certain rights and privileges. Most of the leasing articles written on this website focus on leasing ramifications you need to know. If you read and understand the articles in the equipment leasing category on this site, you have a pretty complete understanding of leasing. With that, you can confidently answer yes, to question 6. above.
Late Lease Payments Will Cost you Dearly
If you tend to make payments casually late, your effective lease rate will go up dramatically. Suppose you negotiate a lease payment of $100.00 for 60 months. So, you’re happy as can be with your deal and the wonderful equipment it affords you. Woops, you’re late! You’re going to accrue a late fee and there is no getting out of it. Sure, you can call and complain and the leasing company will probably let you off the first time, but not after that. Lessors make a lot of money off of late fees. $35.00 is a very cheap late fee, believe it or not. Can you imagine the effective interest rate on a lease where a late fee of $35.00 is applied every third payment?
You can see, the question to buy vs. lease equipment can be decided pretty easily if you’re one who like to relax the payment schedule. Needless to say, a person or business who can’t or won’t keep their payments on time, should stay away from leasing. On the other hand, you could have a bank auto debit or ach done each month. That will solve the tardy problem.
Cash Simplifies Matters
Let’s revisit our 6 questions in the earlier paragraph. If you answer yes, “I can afford to pay cash”, then you have choices. The first and most important of which is would you rather make a payment or complete the deal and write a check. The answer may depend on what is a better deal and that depends largely on your idea of what is a deal. The best way to determine the “deal” is to consider what a lease is and what it is not. The first thing you need to know is that most equipment leases are capital finance leases. That is they are fully amortizing installment loans for all practical purposes. Furthermore, the tax advantages are similar to a purchase. Sure, you may be able to capture a 179 deduction, but you get that with a purchase too. A capital lease doesn’t allow you to write off payments. Instead, you depreciate the equipment and list it on the balance sheet. An operating lease, which is what most sales people refer to, rarely exists for equipment. In fact, beginning in 2019, the operating lease is wiped out for all equipment leases. That’s as a result of the Financial Accounting Standards Board rulings of February 25, 2016. So, the benefits of leasing are a matter of payments vs. cash outlay.
People in business often come to me in my copier company and proceed to tell me that they like the idea of leasing because if something breaks its covered. There is an underlying assumption by many people that a lease includes insurance unavailable through purchasing. This is simply not true. My most spoken fact about leases; “equipment leases do not include service”. Perhaps people are confused because of bundled service. What you need to know is right there in the lease. The clause in every equipment lease I’ve seen in 30 years, specifically denies implied or explicit warranties. Think of the lessor as a finance company, because that’s where their involvement ends in an equipment lease. However, because all capital leases are non-cancelable, you will have to make the payment, the entire term of payments come hell or high water.
If you finance the service in with the lease, the lessor passes thru the service funding to the equipment dealer each time you make a payment. This type of arrangement is becoming progressively more popular for copier leases, software maintenance and other service intense leased equipment. However, that doesn’t change the fact that its not the leasing companies responsibility to see that your equipment functions as you bargained. The service agreement is between you and the service dealer that you signed up with. It is a bit confusing, but important to understand where the obligations fall. Don’t make a leasing decision based on a perceived belief that you somehow leverage a better service plan.
Summary of Buy vs. Lease equipment – What’s better
Due to section 179 accounting deductions, the tax advantages of equipment leasing versus that of equipment purchasing is more of a myth than reality for small businesses. Leasing is a financing strategy that allows you to keep your business capital in your coiffures and opt for making a monthly payment instead. The concept can be compared to paying an employees salary way in advance analogous to purchasing, and wring a weekly or biweekly wage check, analogous to leasing. In other words, leasing allows you to pay for the benefit of the equipment as you receive the benefit. Really, the question of buy vs. lease equipment comes down to preference.
Some business leaders may not prefer to have payment obligations hanging over their head. While others, find making payments far better than writing large checks for purchasing.
What is certain, is that in a lease you are obligated to make all of the payments and there is no cancelation for any reason. You take the risk of service and future functionality of the equipment. In a purchase, you get the same thing with just a different method of paying.
The purpose of this article is not to persuade you whether leasing is good or bad, or if you should or shouldn’t lease. It is to dispel rumors that often cause one to lease and instead to get you thinking about what is important to you that should affect your decision of whether buying or leasing is best for you.