Should You Buy or Lease Equipment for Your Small Business?
Is there any more nerve-racking process in the early stages of running a small business than having to secure equipment for your team? Probably not. Here you are, your hard-earned (or borrowed) capital in hand, trying to decide how to go about giving your company all of the equipment it needs to run successfully.
You aren’t even close to making your first cent and you are already spending a ton of money. It’s a pretty rough experience.
So what do you do? First, you need to take inventory and create a very detailed list of what it is that you exactly need, categorizing every item on your list by priority.
Yes, we’re going to talk about deciding whether or not you are going to purchase or lease equipment, but before we get into that, let’s talk a little about determining what equipment you are going to want to procure.
What’s Absolutely Necessary?
Before you start buying anything, you really need to think long and hard about what equipment is absolutely necessary for the first phase of your business venture. It obviously can’t be stressed enough how important this first step is and how seriously it needs to be taken.
A good idea for compiling this type of list is to create two columns: Need and Want. This is how you will be able to get a much clearer idea of what pieces of equipment are absolutely necessary from the get-go.
There are other aspects that you need to take into consideration as well. Of course, price is a big one. You also need to think about your office and how all this equipment will fit into your workspace.
Do you really need a copy machine or do you have a place close to the office where you can get copies made when necessary? Do you really need a cappuccino machine at this phase?
Be sure to ask yourself all these questions and answer them honestly before you start spending a single penny on equipment.
Always Go With Quality Over Savings
Once you’ve decided on what you need to buy, it’s time to start thinking about the exact models you want to get. Of course, price tends to be the determining factor when you’ve entered this phase of the procurement process.
And sure, price is important, but it’s not everything. Quality should really be your number one focus. This is especially true for more sophisticated equipment. If you are unfamiliar with certain equipment, it’s always a good idea to do some research online, read some users reviews and educate yourself.
If you know what you want and you find a good deal that fits into your budget, then snap it up. But if you have to decide between a cheaper model that is prone to problems and a more expensive model that is stable and won’t require maintenance that often, go for the more expensive model because it will pay off in the long run.
Decide on how critical the equipment is first. If it’s a piece of equipment that isn’t as important to your business right now, then you might be able to get away with getting the bargain model. But if it’s a critical piece of equipment, then spending more to get the best possible model is the way to go.
Got all that? Now let’s look at the pros and cons of leasing and buying equipment.
Note: It’s also important to remember that you don’t have to commit to exclusively buying or leasing. You can make that decision on an case-by-case basis.
Why You Should Lease
1. Your Equipment Will Always Be Up-To-Date
If the equipment in question always need to be state-of-the-art and your business depends on this, then leasing is probably a better option.
Any equipment that needs to be updated on a very regular basis is better off being leased. When you are leasing, it’s much easier and faster to get that equipment updated.
Constantly buying new models can cost a ton and sometimes you just won’t have the money for it, which inevitably leaves you stuck with outdated equipment.
2. You’ll Spend Less Up Front
It’s much easier to integrate leasing into your budget, especially if you are a company that is just starting out.
You know what your payments are going to add up to on a monthly or yearly basis, which means that you can prepare your finances to anticipate these costs. If you are buying, you are going to need a lot more money up front to get going, which sometimes just isn’t realistic for budding businesses.
It’s much easier to budget leased equipment over time than to find a big chunk of money to buy immediately.
3. The Tax Deductions are Great
One of the best things about leasing is that it is usually 100 percent tax-deductible.
Leasing equipment falls under the operational expense category of the 179 IRS Tax Code, making all of your renting costs deductible in full.
4. No Maintenance Fees
The absolute best thing about leasing equipment is that fixing it when it’s broken is not your concern. Under the lease, the company that you are leasing the equipment from is obligated to fix it for you free of charge.
Most office equipment is subjected to its fair share of wear and tear, which is much easier to live with when you know that you are not going to have to fix it on your own.
Maintenance costs are included in your lease, so it’s not your responsibility to get things repaired when they break down.
Why You Shouldn’t Lease
1. It’s More Expensive In the Long Run
This shouldn’t be news to anyone who has ever leased a vehicle or has a mortgage on their home. It’s all about the interest. Whenever you are leasing anything, there will be some type of interest rate included.
This means that you will pay more over time than you would have if you had purchased the equipment right away. Even if you lease the equipment long enough to where you now own it, you will have paid a lot more money than it was originally worth, and of course, much more than its current value.
2. No Chance of Making Money Back
When you buy your equipment in full, you can always sell it and make some of your money back if you don’t need it anymore. But when you are leasing, you have no equity.
That really is one of the biggest issues. It’s not necessarily money that’s poorly spent, but it’s money that you have no way of getting back if it turns out that you don’t need that particular piece of equipment any longer.
3. Lease Terms Can Be Problematic
Frankly, signing a lease agreement can be a pretty annoying process. Many lease agreements come with a pre-determined period of time that the lease will last for, which is usually non-negotiable.
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What does this mean? It means that if you’re done using a piece of equipment, you might not be able to send it back right away. Instead, you will have to keep paying for it until the lease agreement runs its course.
This can also lead to space issues, especially when it’s a big piece of equipment. You might have to hang on to something even if you don’t need it any longer, which can make it seem like you are piling up equipment in your limited amount of office space and becoming a borderline horder.
4. Maintenance Can Be a Hassle
When it comes to leasing, maintenance is really a double-edged sword. On one hand, you don’t have to pay for it. But on the other hand, it’s completely out of your control. That means that you have to rely on your leasing company to get the job done, which is not always optimal.
This basically means that you could be in for a wait if you need something repaired. Sure, you’re not paying for it, but sometimes time is a factor and you would rather pay for the repair yourself to get it fixed quickly. And if you have signed a lease agreement, that just is not an option.
5. You Can’t Always Choose
If you are leasing equipment, then your options are limited to what the leasing company you’ve signed with has in stock at the moment. That is why you should really take a close look at what equipment and brands the leasing company offers before signing on with them.
There’s a good chance that the company might not have the exact brand or model that you want in stock, which means that you will have to settle for a piece of equipment that might not be your top choice every now and then.
Why You Should Buy
1. You’re the Owner
This is pretty self-explanatory. If you buy all your equipment, you own it. This means that you can do anything you want with it. You can fix it when you want and need to, and you can sell it if you don’t need it anymore.
There is no one telling you what you can and can’t do with your equipment if you have purchased it in full. You’re in complete control.
2. No Contracts Involved
Another great thing about buying is that you never have to deal with laborious leasing contracts. It’s just easier. Taking out a lease usually involves tons of paperwork, because every leasing company will ask for you to provide detailed financial information about your company before signing anything.
When buying, all you have to do is pick what you need and pay for it. There are no negotiations and very little paperwork is involved in the process.
3. You Can Always Choose
As mentioned earlier, leasing limits your choices. When you are under contract, you are only able to lease equipment that the company you are leasing from currently has in stock. When you are buying, there are no restrictions, besides budget.
You can simply find the model and brand that you want and purchase it if you have the money for it.
4. Maintenance Is Less of a Hassle
One of the downsides of purchasing equipment is that you are going to have to flip the bill whenever you need to get something repaired. But there is an upside to that.
When you are paying for maintenance, you don’t have to rely on anyone else to get it done. When you are leasing, you have to wait for the leasing company to get your equipment fixed. Sure, it won’t cost you anything, but it could take a while. And there really is nothing that you can do to speed up the process when you are renting. Since the leasing company is paying for it, they make the rules.
But when you have purchased the equipment, you don’t have to wait for anyone and can get the repairs done immediately.
5. Everything is Deductible
Here’s where you really can’t lose. Whether you are purchasing equipment or leasing it, pretty much everything is completely deductible.
According to Section 179 of the IRS code, all of the equipment that you either purchase or lease for your company in the first year can be deducted 100 percent.
Why You Shouldn’t Buy
1. It Costs More Up-Front
If money is tight, then buying might just not be an option at this point in your business plan. Surely, it’s much easier to budget leasing, since you only have to worry about making smaller monthly payments instead of forking over large amounts of money all at once.
If you want to buy all of your equipment at once, you might then have to make sacrifices elsewhere and pool all of the money you have that might have been meant for marketing or advertising into buying equipment.
Trying to buy more than you can initially afford often leads to choosing cheaper equipment and settling on equipment of lower quality that fits into your budget better. This can obviously backfire, since you will then be stuck with outdated or lower-quality equipment that you’ve already paid for and can’t simply give back.
2. Maintenance Depends on You
This is why one of the most important things that you have to look at when buying equipment is product warranty. After you have purchased the equipment, you are responsible for maintaining it. This can get really expensive if you’re having bad luck and your equipment is constantly breaking down.
The good thing is that you don’t have to depend on anyone else to get the repairs done, but the bad thing is that you are paying for everything, which can really eat away at your budget.
3. Keeping Up-to-Date is Harder
If you’re buying everything, you are eventually going to be left with some outdated equipment that you might not have the money to upgrade right away. This is especially true for computer-related technology.
That’s why a combination of buying and leasing is probably the best scenario. Buy the stuff you know you won’t have to upgrade any time soon, and lease the technology that needs to be always up-to-date.
It cannot be stressed enough what an involved process procuring equipment for your business is. There are so many things to take into consideration.
Not only are you going to have to look at prices, lease contracts, warranties, tax deductions and resale values, you are also going to have to take into consideration how long every piece of equipment will be needed, how quickly it will become obsolete, the potential revenue that will come from using the equipment, how it fits into your office physically, and so much more.
If there is one final takeaway from this all, it’s that this is a process that requires patience, critical thinking and meticulous planning above all else.
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