Whether your business needs a $2,000 photocopier or a $20,000 truck or jetter, you face a key decision: Should you buy the equipment or lease it? There’s no one-size-fits-all answer. It all depends on business and financial factors.
Let’s start with pros and cons of leasing versus buying business equipment. Then we’ll look at some details of what’s contained in an equipment lease.
Buy or lease?
Leasing can be the better choice if you have limited money in the bank or if your business needs to move up to improved equipment every few years. With a lease, you probably won’t have to make a down payment. You can start using the equipment right away without depleting your cash reserves. And typically you can deduct the lease payments on your tax return, reducing the tax you owe.
Another advantage is that it may be easier to lease equipment than to qualify for a bank loan that would let you buy the equipment outright. This could be important if your business hasn’t yet established a sterling credit record. And if you need high-tech equipment or equipment that’s likely to become obsolete quickly, leasing frees you up to get the next generation of equipment once the lease expires.
But while there are several advantages to leasing, there are also some drawbacks. For one thing, over the long haul, it’s usually more expensive to lease than to buy. The monthly payments will add up to more than the price of the equipment. What’s more, when the lease is over, you must return the equipment to the company you leased it from – though this isn’t a big deal if the equipment has become obsolete.
By contrast, when you buy equipment, you own it forever, giving you a choice of when it’s best to upgrade. With equipment that has a long life span, it may pay to come up with the money to buy it. And since you’ll own it, when it’s time to move on to a newer version, you may be able to bring in some cash by selling the older version.
There’s a tax advantage, too. When you buy new equipment, you can usually write off the entire cost in the year you buy it. This is known as a Section 179 deduction. Check the IRS site at www.irs.gov for details, or ask your accountant to explain.
On the negative side, buying equipment means you’ll have to come up with a hefty down payment. Often, it’s 20 percent of the purchase price, or more, if you finance the equipment through a bank. And as technology changes, the equipment may become obsolete even before you’ve paid it off.
Understanding the terms
Now, let’s assume you’ve weighed the pros and cons, and you’ve decided that leasing is the way to go. What should you look for in the lease? Here are some suggestions:
Are you personally liable for the lease payments? You are if your business is a sole proprietorship or partnership. You are not if your business is a corporation or LLC – unless the lease requires a guarantee from you as a business owner. Check the lease carefully to see if you’re required to sign as a guarantor.
Are there any charges in addition to the monthly lease payments? Sometimes, a lease requires a business to pay a delivery or setup charge, or both. A lease also may require you to insure the equipment, and to pay any personal property tax on it that may be assessed by the local government.
What’s the penalty if you’re late making a payment? Some leases hit you hard if you’re more than a few days late.
Who is responsible for repair and maintenance costs? See what the lease says about this. If you have to pay these costs, it can add significantly to your financial burden, especially with equipment that’s subject to frequent breakdowns.
Can you assign the lease? If you sell your business, you’d like to make it easy for the buyer to take over the remaining portion of the lease. Some leases prohibit assignment.
Is there a way to get out of the lease early? Some leases have an escape clause, though usually at a substantial cost. Still, it can be good to know you have a way to get out if the equipment doesn’t meet your expectations, or if you’d like to upgrade.
Can you buy the equipment when the lease is over? Some leases give you the option of paying a preset amount and keeping the equipment. Even if the lease doesn’t contain such a clause, you may be able to negotiate a buyout once the lease ends.
Do you have to keep the equipment at a specific location? Many leases have such a requirement. This can be a problem if your business has several locations, or if you’re planning to move. Deal with this issue upfront so it won’t be a headache later on.
Remember, leasing is often a great option – as long as you go into it with your eyes wide open.
