As a business owner, you might consider purchasing new equipment outright when it's time to upgrade. However, there's another option that offers several advantages and disadvantages to your business: leasing equipment. In this article, we'll look at both the advantages and disadvantages of leasing equipment, and why this might be a better option for businesses compared to purchasing upfront.
Advantages of Leasing Equipment
Leasing equipment has many advantages for businesses, some of which include:
1. Cost-effective
When looking to purchase new equipment or upgrade existing equipment, many businesses may not have the necessary capital or cash flow. In this case, leasing equipment is a cost-effective option as it doesn't require a large upfront payment like a purchase would. Instead, it allows businesses to pay for equipment over a set period, helping to manage their finances more efficiently.
2. More flexibility
Another advantage of leasing equipment is that it can offer more flexibility than purchasing. For example, the business can choose to lease equipment for a specific project, and then return it to the leasing company once the project is complete. This is perfect for businesses with projects that require special equipment, as it allows the business to use the equipment for a short-term without incurring the long-term costs of owning it.
3. Tax advantages
Leasing equipment also comes with tax advantages that buying equipment does not. Lease payments are considered an operating expense, which means they can be fully deductible, reducing tax bills for the business.
4. Latest equipment
As technology advances, newer and better equipment are constantly being released. By leasing equipment instead of purchasing outright, businesses can ensure that they always have the latest equipment without incurring the high costs of upgrading or purchasing each time.
Disadvantages of Leasing Equipment
While there are many advantages to leasing equipment, there are also disadvantages that businesses need to keep in mind before committing to a lease agreement. Some of these include:
1. Long-term costs
While leasing equipment helps reduce upfront costs, it can end up costing more in the long run. The total amount paid for leasing equipment over the agreed period (say, three years) is typically higher than the cost of buying the same equipment outright.
2. Obligations and limitations
Leasing equipment is not the same as owning it. As such, those who lease equipment often have more obligations and limitations. For example, a lessee might have limitations on the amount of maintenance they can perform on the equipment, whereas an owner is free to perform any upkeep they desire.
3. No long-term asset
Leasing equipment means that your business will not own the equipment at the end of the lease period. This means you cannot sell or trade it in for a new system or upgrade. Therefore, if you need to replace or upgrade the equipment, you'll need to consider the cost of leasing new equipment again, whereas owning the original equipment would have reduced this cost.
When Leasing is the Most Viable Option
To determine when leasing is the most viable option, several factors need to be considered. One is the business's financial capacity, as leasing is a viable option when there is a lack of available capital to purchase assets upfront. The duration of the lease contract and how the costs compare to a purchase must also be considered in this context.
Another factor is the type of equipment that businesses need to invest in, and how quickly technology is changing for that equipment. This is because businesses that need to upgrade frequently may want to lease equipment rather than invest in permanent fixtures that may become outdated faster.
An example of an industry that benefits from leasing is the medical industry, where costly and sophisticated equipment would result in a significant financial burden if purchased outright. By leasing medical equipment, healthcare providers can keep up with changes in medical technology while spreading expenses over several years.
In conclusion, leasing equipment comes with many advantages and disadvantages when compared to purchasing outright. Therefore, every business has to consider the cost and their financial capacities when leasing equipment. Important details that businesses should consider when deciding on leasing include how quickly technology is changing in the equipment it needs to invest in, how long the lease contract must be, and the business's available capital. Despite the disadvantages of leasing, it could still be a better alternative to purchasing upfront depending on the needs of your business.