Deciding Whether to Lease or Buy for Your Business
Small-business owners often find that they need a fair amount of stuff — from office equipment to an actual office — to start a company. But that doesn’t necessarily mean they have to purchase everything outright.
But when should you lease vs. buy? The answer depends on your needs, budget, and goals. Here are the advantages of each, plus some decision-making tips.
The advantages of leasing include:
- It’s a much smaller cash outlay to lease computers and other machines than to buy them.
- Leasing gives you a trial period to determine whether the equipment is the right fit for the business.
- A maintenance contract may be included in the lease.
- The cost of renting equipment may be deducted on your tax return.
- It may be less expensive to keep pace with technology by upgrading rental equipment than by purchasing replacement gear.
The advantages of buying include:
- Purchasing equipment adds assets to your business.
- You can take advantage of tax depreciation benefits on the items that you own.
- Once items are paid for, you'll pay no additional monthly expenses for simply keeping them.
- An item you own is always the property of the company and doesn’t have to be returned.
How to Choose
There isn't really an easy or "one size fits all" answer, because every business and business owner is different. But for an established business, taking a close look at your expenses and comparing the tax strategies of owning vs. leasing will help you make an informed decision.
"We have to evaluate the decision based on cash flow, technology, tax situations, and many other factors," explains Sam Levy, owner of Levy Tax & Consulting. "The advantages of leasing, such as flexibility and better cash flow, are weighed against the advantages of purchasing, including ownership and favorable depreciation rules for tax purposes."
Cate Costa, a business consultant who specializes in advising first-time entrepreneurs, says leasing is definitely the way to go for startups.
“Startups need to survive the short term before they can look to the long term, and cash flow is key to their survival at the early stage,” Costa says. “Leasing instead of buying big ticket items like office space and equipment to keep expenses and debts low is the way to go 99 percent of the time,” Costa says.
The one exception to her leasing advice is computers. Costa says they are inexpensive enough that she recommends going ahead and purchasing them.