Leasing or purchasing, which makes more sense?
Leasing required equipment to start a small business is a relatively attractive option as compared to an outright purchase. Leasing equipment provides additional tax savings, requires no down payments and bears no risk of asset value depreciation.
100% of the payment made each month for the lease is tax deductible. This is a significant difference when compared against the interest only deductions available for equipment purchased with financing from a lender, which must be depreciated over a longer duration.
No down payments are essential because adding a new piece of equipment to your business involves some additional costs such as delivery, installation and maintenance charges, amount of which is often included within the down payment when equipment is purchased, while the lender pays only for a part of the actual value of the item. These costs are factored into the monthly payments for leased equipment, thus freeing up additional capital for the small business owner to apply in other, and more critical, areas of the business.
Another advantageous factor is that leasing equipment is relatively easier and faster, with no requirements concerning a business plan, financial statements, tax returns or other paperwork for items valued below $100,000. All that is usually required is a simple form, similar to a credit card application, and which is generally approved next day at the most.
Purchasing equipment, on the other hand, requires all the paperwork as mentioned above, and additional risk mitigation measures, such as ensuring the equipment and proving to the lender that adequate risk management procedures are in place to protect the equipment from loss or destruction. This significantly adds to the cost of your business overheads.
There are thousands of professional leasing companies and also companies which offer leased equipment for specific industries. The rates and terms and conditions may differ, as would any additional clauses, such as buy options in the future. You are advised to consult your attorney and go through the lease agreement carefully, and to talk with a valuation consultant knowledgeable with your particular industry, to understand the long term implications of leasing a specific piece of equipment.
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