The Pros and Cons of Equipment Leasing
If your business needs specialized equipment to complete the work you offer, you must decide at some point whether it’s better to lease that equipment or buy it outright. Many small business owners improve their company’s cash flow by leasing major equipment, but each option has pros and cons. Let’s take a look at a few of those things to consider.
How Does Equipment Leasing Work?
An equipment lease is a contract between the company (the lessee) and the financing company (the lessor). Instead of buying machinery directly, payments are spread out over a set timeframe with a corresponding interest rate. The financing company might be a bank, leasing company, or the equipment manufacturer.
PRO: Leasing keeps initial costs down by not putting the entire cost of the equipment out immediately.
CON: Some leasing companies may also require a personal guarantee of the lease by the business owner.
There may be some initial “down payment” on the lease. The monthly lease payment is based on:
- The purchase price of the equipment
- An interest rate built into the payments
- Term of the lease
- The creditworthiness of the lessee
- The estimated residual value of the equipment at the end of the lease
During the lease period, usually, the company has an obligation to maintain and insure the equipment. Depending on the terms, the lessee may buy the equipment or just let the lessor take it back at the end of the lease. This option to purchase at the end of the lease gives the business the right and not the obligation to purchase.
PRO: This choice can enable the business to reduce the risk of owning a piece of obsolete equipment.
CON: You most likely won’t own the equipment after paying the lease terms.
Other Pros & Cons of Equipment Leasing
The lease approval process is typically a swift process. The amount of paperwork may be less than that required for a business loan. If the lessor is also the equipment vendor, the lease may have a lower interest rate built into it than what would be used by an independent leasing company.
PRO: Any initial down payment will, of course, be less than the total cost of the equipment.
CON: Interest on payments means you will pay more than the cost of equipment over time.
PRO: Lease payments can be tax-deductible business expenses*.
CON: If you instead own the equipment outright, there could be annual depreciation expenses you can take as deductions — depending on the type of equipment you own, how long the equipment is expected to last, if it meets IRS requirements for depreciation, and other factors.*
Make The Right Choice for Your Business
When evaluating whether to buy or lease, weigh the benefits of improved immediate cash flow against the cost of interest built into the lease. Also consider the different tax implications of leasing versus owning the equipment. If leasing makes sense for you, this method of financing can be a powerful way to grow your business.
*Consult with a certified tax accountant to confirm deductions for your particular business.
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