To lease or to buy, that is the question faced by businesses across the country. Here are a few things to consider when trying to decide if leasing is a better option than buying.
Tax Advantages: One of the most significant advantages to leasing over buying are the tax benefits. If structured correctly, lease payments, unlike loan payments, can be expensed in the period they are paid as a general operating cost. This results in a lower after-tax cost for the credit, which results in a lower tax liability when compared to depreciating the equipment cost and expensing the interest portion of the loan payments. Expensing the full payment is also easier to account for on a company’s financial statements because only one general ledger entry is necessary to “book” the expense (instead of two entries necessary to account for loan payments).
Save Money: By leasing, a company can finance 100 percent of its equipment costs. Since a lease often does not require a down payment, security deposit or origination fee, a business can use capital or other credit means to invest in their company. Those investments often times can produce income that negates the cost of the lease. The same justification can be made for businesses that can afford a large cash outlay for equipment. That cash could be reinvested in another more profitable sector of the business negating the cost of the lease.
Makes Budgeting Easier: Leasing allows a company to acquire equipment immediately without a huge cash outlay. Also, if structured correctly, a lease provides a monthly expense that doesn’t change. If the equipment is owned, or the lease improperly structured, maintenance or repairs could punch a large hole in your budget.
Avoid Inflation: The terms of most leases are fixed. Therefore when the “real cost” of the lease is adjusted for inflation, a business can actually save money over time. The net cost of the lease will actually decrease while gross revenues increase.
Leasing keeps equipment up to date and businesses competitive: A rule of thumb from businesses and financial advisors encourages businesses to match the productive life of an asset with the liability associated with that asset’s acquisition. By matching the lease terms to the life of the equipment, a company can match payment obligations to the productive, revenue-generating life of the asset. This is especially true with technology. It doesn’t make sense to make a huge cash outlay for equipment that may be obsolete a year later.
Leasing provides the kind of flexibility that buying can’t: Leasing allows a business to evolve and change with its industry, and it can provide short-term solutions that encourage long-term growth. By choosing to lease instead of buying, a business can avoid the initial outlay required for new equipment, and it won’t ever get stuck with outdated equipment.
Leasing provides businesses, particularly small businesses, with options. It can provide a way forward for a business without limiting growth.