Leasing vs. Buying Equipment for Your Small Business
If your business needs to purchase new equipment, you may face a dilemma of whether to lease or buy. It is important to understand your options. The following information provides a basic overview of leasing vs. buying business equipment.
Leasing Your Small Business Equipment
- Leasing is generally more expensive than buying equipment outright. You will pay fees and interest, which is why it is important to understand the full cost of a lease agreement before you sign.
- Lease payments are usually tax-deductible. Discuss the tax implications with your accountant or tax professional to determine how lease payments may impact your tax liability.
- In most cases maintenance is part of the lease agreement. This means the leasing company is responsible for repairing equipment that has problems due to standard wear and tear. You should understand the terms and conditions of the maintenance agreement. How long does the leasing company have to make a repair? What types of repairs are excluded?
- Some leases may auto-renew or trigger buyouts at the end of the term. Do not make the mistake of missing a renewal or termination notice deadline. Make sure you understand what happens at the end of the lease and set a reminder so you do not miss any important deadlines.
- Defaulting on a lease can be costly. Again, understanding the initial terms before you sign is critical. Some lease agreements may allow the leasing company to repossess the equipment and collect future payments owed, without deducting the value of the equipment.
Buying Your Small Business Equipment
- You will pay a higher cost upfront to buy equipment but the overall cost will be lower because you will avoid finance charges.
- Ownership will give you more flexibility to sell equipment later if you no longer need it or decide to upgrade. Beware, if the equipment becomes outdated or obsolete, it could lose significant value.
- You will not have to sign or review a complex lease agreement.
- Tax deductions for purchasing equipment are different and may be limited. Make sure you take advantage of any potential deductions for depreciation. Discuss your tax liability and any potential deductions with your accountant or tax professional.
- You are responsible for repair or replacement costs when any equipment you own breaks. New equipment may be covered by a manufacture’s warranty for a specific period of time. If cash flow is an issue for your business, unexpected repair bills could be challenging.
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