When your business is in need of new networking equipment, computers or other technology, should you lease it or buy it? If you aren’t sure, keep reading. We will be taking a close look at both the benefits and disadvantages of both buying and leasing technology equipment, in addition to the questions that you should ask to make sure you receive the best deal.
The Benefits of Leasing
Your equipment stays up-to-date with leasing. Computers and other business internet equipment become obsolete eventually. When you have a lease, the financial burden associated with obsolescence is passed onto the equipment leasing company. For instance, say you have a copy machine that you are leasing for two years. Once your lease expires, you can lease newer, cheaper and faster equipment.
Your monthly expenses will be predictable. When you have a lease, there is pre-determined monthly line item on your books. This can assist you with budgeting much more effectively. According to the results of a survey from the Equipment Leasing Association, thirty-five percent of the respondents stated this was the second-highest benefit to leasing.
You don’t have to pay anything up front. It is common for small businesses to struggle with their cash flow so it is important to keep as as much money on hand as possible. Since it is rare for leases to require any down payment, it is possible to obtain new equipment without needing to tap into much-needed funds.
You can keep up with the competition more easily. Leasing allows sophisticated technology to be acquired by your small business, like a voice over internet protocol (VoIP) business phone systems, that you may not be able to afford otherwise. This results in you being able to keep up with some of your larger competitors better without your financial resources being drained.
The Downsides of Leasing
In the long run you will end up paying more. Leasing will almost always cost you more than buying will. You are obligated to continue paying even if you are not using the equipment anymore. Depending on what your lease terms are, you might need to keep making payments for the whole lease period, even when the equipment might not be needed any long. If your business does change this can definitely happen.
The Benefits Of Purchasing
It is much easier compared with leasing. It is easy to buy equipment. You just determine what you need, and then you go purchase it. However, when you take out a lease, there will at least be some paperwork involved, since leasing companies frequently ask for updated and detailed financial information. You might also be asked where and how the leased equipment is going to be used. It can also be complicated negotiating lease terms. Also, if you don’t properly negotiate, you may end up with unfavorable terms or pay more than is necessary.
When it comes to maintenance you call all of the shots. Often equipment leases will required to keep the equipment maintained according to the specifications issued by the leasing company, and that can end up being expensive. However, when you purchase equipment outright, you get determine your own maintenance schedule.
Your equipment costs are deductible. According to IRS code Section 179, you can deduct the entire cost of recently purchased assets, like computer equipment, during the first year. On the other hand, with operating leases – which as the kind that small businesses most favor – you can deduct your monthly payment only.
The Downsides to Buying
The initial outlay for equipment might be too high. Your business might need to come up with a large sum of money or tie its lines of credit up in order to obtain equipment it really needs. Those funds and lines of credits could be used in other places for advertising, marketing and other function to help expand your business.
You will eventually end up stuck with equipment that is outdated. As previously mentioned, computer technology quickly becomes outdated. An expanding small business might need to update its technology every 18 months or so in some areas. What that means is that you will be stuck with equipment that is outdated eventually that you will need to recycle, sell or donate.
Ask the Right Questions
If you are considering leasing equipment, then you will have to do your homework to make sure you end up with the most favorable terms. The following are a couple of questions to help you get started with the process:
What kind of lease are you being request to sign – an operating lease or a capital lease?
A capital lease is very similar to taking out a loan. With this kind of lease, the equipment is treated as an asset on your company’s balance sheet. You will receive all of the benefits – like tax depreciation – in addition to the risks – obsolescence – that you receive with ownership. Frequently capital leases last up to five years.
When you have an operating lease, ownership is retained by the leasing company, and the equipment is treated as a monthly operating expense for tax purposes instead of a depreciable asset. Overall, operating leases tend to be more popular with small businesses since funds are not tied up and the lease term tends to be short – three years or shorter.
Is a buyout option available?
You might be given the choice between a $1 buyout option and fair market value (FMV) value. FMV means the equipment can be purchased at the end of the lease at its fair market value, which may be hundreds of dollars. By contrast, with a $1 buyout options, the equipment is yours at the time the lease expires for $1. Although that might sound like it would be the best option, FMV lease monthly leases tend to be less than $1 buyout lease payments. Choose the FMV option, if you are reasonably certain you are going to want to upgrade to newer technology at the time that your lease expires.
How long is the lease term for?
Computer equipment leases tend to run for 24, 36 or 48 months. A longer lease term will result in lower monthly payments. However, over time, you will most likely end up paying more with a longer lease term.
Will I be required to insure the equipment?
Some leasing companies will require that your leased equipment be insured. If you fail to do this, fee might be added onto your monthly payments in order to cover insurance.
Can the lease be added to?
A majority of leasing companies won’t mind if equipment is added to an existing lease that you have with them. They will recalculate your lease payment. Usually the lease terms don’t change.
Will I be able to terminate the lease early?
What happens if you don’t need the equipment any longer that you are lease or you need to upgrade sooner than expected to newer technology? Determine in advance if the lease can be paid off early, and if you will have to pay a prepayment penalty (and how much).
There are a couple of basic rules of thumbs that you can use to help you in your decision of whether you should buy or lease. If you have fairly small equipment requirements and have the money available – or have the ability of getting a low-interest loan – buy it. In the long run that will save you money. However, if your equipment needs are substantial, like needing computers for 10 employees, then the better option might be to lease. Why tie up a large sum of cash when that money could be used for growing or establishing your business?