Pros and Cons of Leasing vs. Buying Equipment

For business owners who need certain equipment like computers, machinery, or vehicles to operate, there is a lot to consider. Beyond simply weighing the overall costs of buying or leasing a piece of equipment, you also need to consider maintenance, tax deductions, flexibility and more.

When you start narrowing down on the type of equipment your business needs, it’s a good idea to thoroughly consider the pros and cons of leasing versus buying. In certain circumstances, the cost-benefit of one option may strongly outweigh the other.

Leasing

Pros:

• This method is good for equipment that needs to be updated often because you can acquire updated technology easier and quicker. If you will need to update your equipment on an annual basis to remain competitive, leasing allows you to avoid being stuck with outdated equipment.
• There is less expense up-front with leasing because you have easy, predictable payments. You don’t have to deal with one large lump sum to purchase what you need, making it easier to budget for the equipment over a longer period of time.
• Leasing is often 100% tax-deductible as an operational expense under the 179 IRS Tax Code.
• Leasing is flexible and offers more options when it comes to the type of equipment you get. You aren’t as restricted by high up-front costs or other hesitations to try something new that may help your business.
• With leasing, you don’t pay for maintenance. If something breaks or has issues due to normal wear and tear, the leasing company is in charge of fixing the equipment.

Cons:

• You usually pay higher costs over time than you would if you paid up-front. Most leasing options require interest to be paid as well.
• Since you don’t own the equipment, it gives you absolutely no equity. You won’t have the option to sell the equipment once you are finished with it, so there is no potential to make any money back.
• The available length of lease terms may be longer than you need. Strict agreements may force you to pay for and keep a piece of equipment for a longer time frame than you require, resulting in wasted funds and space. This can be especially difficult for larger pieces of equipment that you need for a short period of time but don’t have storage space for.
• Maintenance is up to the leasing company’s specifications, so it may be difficult to get things fixed. In some cases, you may disagree about what the leasing company should be responsible for, and when they do proceed with repairs, you may have to wait to get things fixed that need immediate attention.
• Availability of products may be limited depending on the stock of the leasing company. Your choice of brands or models could potentially be out of stock or not carried at all, so you could have to settle for something else.

Buying

Pros:

• You will own the equipment, so you can make any alterations necessary. Maintenance is also in your hands, so you can make sure problems get fixed immediately. You won’t have to wait for issues to be addressed or need permission to make changes.
• You have the option to sell the equipment when you are finished with it, allowing you to recover some of the cost.
• Tax incentives under Section 179 of the IRS Tax Code are larger for purchasing office equipment but have limits. If your equipment doesn’t qualify under Section 179, you may be able to leverage a depreciation deduction for the equipment you have purchased for your business.
• Buying is easier because you don’t have to deal with agreements and contracts. You simply pick out what you need and pay for it. This works great for smaller equipment that is easy to store, as well as equipment that has a long life.
• You have complete control over what you get because you aren’t limited by a leasing company’s stock. If you want a particular model or brand, you have the ability to order exactly that.

Cons:

• You will have a higher initial cost as opposed to lower monthly payments that may be easier to budget. It may be difficult to pay for costly equipment all at once. Higher initial costs may keep you from buying exactly what you want and may force you to settle for a lower-cost option. There is also the option of getting equipment financing that uses the actual equipment as collateral on your loan, securing very low interest rates, smoothing out payments and facilitating cyclical upgrades.
• For technology that is outdated quickly, you are stuck with it because you own it. You then have to decide if it is worth it to continue to use it, repair it, store it or sell it.
• You are responsible for all maintenance, including costs. This can get pricey depending on what issues you encounter, and making repairs is not always simple. You could potentially be burdened with broken equipment that you can’t return or sell. Keep an eye on the product warranty to see if it covers repairs and for how long.

Determining costs for equipment through either method should include considerations of tax deductions and/or the potential resale value. Consider the potential revenue derived from using this equipment, how quickly the equipment will be outdated, the size of the equipment and the overall costs. Each decision regarding equipment leasing or buying should be made carefully to best fit your company’s situation and needs.