Every small business owner encounters a pivotal question at some point: should you lease or buy the necessary equipment for your business? This decision can significantly impact your business’s cash flow, tax returns, balance sheet, and overall cost structure. Here, we’ll delve into both options, leasing and buying, to see which might be best for you.
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The Pros and Cons of Leasing Business Equipment
Understanding Lease Payments and Terms
Leasing equipment provides a less burdensome upfront cost compared to outright purchasing. Small business owners make monthly payments over a specific period, typically the lease term’s duration. At the end of the lease, they have the option to purchase the piece of equipment, renew the lease, or return the equipment to the lessor, or leasing company.
The Bright Side of Leasing: Less Upfront Cost, Flexibility, and Tax Benefits
Leasing is often appealing due to lower upfront costs, allowing businesses to acquire the types of equipment they need without a large initial outlay. Leasing can provide increased flexibility, particularly useful for businesses dealing with rapidly obsolescing equipment. Office equipment, for example, could become outdated before the end of the lease term, and leasing options can help a business stay on the cutting edge.
Moreover, leasing business equipment can have some tax benefits. Lease payments are generally considered a business expense and therefore tax-deductible, providing some relief during tax season.
The Cons of Leasing: Long-term Cost and Liabilities
Despite these advantages, leasing isn’t without its drawbacks. Over an extended period, the cumulative lease payments can far surpass the equipment’s original purchase price, making the overall cost of leasing more expensive. In addition, businesses can face liabilities for damaged or misused equipment under the lease agreement.
The Advantage of Buying Business Equipment: A Better Long-term Investment
Buying Equipment: More Than Just an Expense
By purchasing equipment, you’re investing in an asset that will contribute to your business operations over a long period of time. While there might be a larger down payment, the expense can be spread over the lifespan of the equipment, often making it more cost-effective in the long run.
Tax and Balance Sheet Benefits
Buying equipment allows for depreciation, which can provide significant tax benefits. Under the IRS rules, businesses can deduct the value of purchased equipment over its useful life, which can result in substantial savings on your tax return. Additionally, owning equipment can enhance your balance sheet as it counts as an asset rather than a liability, which can be advantageous when seeking additional financing or partnerships.
Maintenance Costs and Resale Value
Ownership also provides full control over maintenance costs and schedules. While some types of leases may include maintenance, others might not. Moreover, if you own a piece of equipment and decide to upgrade, you can potentially recoup some of your investment through its resale value, an option unavailable to those who lease.
Financing Options: Merchant Cash Advances
For many small business owners, the upfront costs of buying business equipment can seem daunting. However, innovative financing options like Merchant Cash Advances (MCAs) can provide the necessary capital to purchase rather than lease equipment.
An MCA works by a funder providing a sum of money to a business owner. Instead of making set monthly payments with high interest rates, the repayment is based on a share of the company’s future revenue until the contracted amount is repaid. This method can align better with a business’s cash flow, as it scales with the company’s performance.
Making the Best Decision for Your Business
Whether buying or leasing, it’s essential to consider the unique needs of your business, the types of equipment you require, and your current financial situation. While leasing may suit short-term or rapidly evolving needs, buying often presents a more favorable long-term financial strategy.
While purchasing equipment might require a larger upfront investment, financing options such as MCAs can alleviate these costs, allowing small business owners to invest confidently in their future. Remember, buying business equipment isn’t just an expense – it’s an investment in your company’s longevity and success.
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, accounting, or human relations advice. You should consult your own tax, legal, accounting advisors, and HR professional before engaging in any transaction.