The question of is it better to buy or lease costly new equipment comes up every time a business needs new fixed assets. While any business can be subject to this, it tends to come up more frequently in professions like Dentistry, Doctors, Restaurants, and Construction.
There are pros and cons to both options and determination of which method best serves the business must be done on a case by case determination.
· There are minimal upfront costs.
· Generally, the full monthly payment is deductible as rental expense.
· You are not stuck with outdated equipment.
· Leasing does not tie up lines of credit or increase debt to equity ratios.
· Maintenance is often included in the lease.
· The payments are fixed and thus easier to budget.
· Leasing is generally more expensive in the long run.
· Lease contracts often contain severe restrictions and penalties.
· The payments are continuous. When you sign a 5 year lease, you are going to be making that same payment for the next 60 months.
· You never build equity in the equipment.
· Ownership. This not only allows you to build equity in the equipment, but it also gives you the right to do with the equipment as you please. Modifications, relocation, etc. are not subject to any conditions and you do not have to seek approval.
· You may qualify for preferential tax treatment. The most common of these is Section 179 Depreciation which can allow you to fully deduct the entire cost of the equipment in the year it is purchased. Even if it is financed. The rules and restrictions to this are too numerous to go into detail in this blog.
· Purchased equipment generally has a lower overall cost versus leasing.
· Once the purchase price is paid, you do not have monthly payments.
· The upfront cost is higher than leasing. Even when financed, there is usually a down payment required.
· Owing outdated technology is a possibility. When you buy something, you are stuck with it until you replace it. Leasing affords you the ability to upgrade to the newest models.
· Major capital expenditures can tie up your equity and restrict your available cash flow.
· Financing a major purchase can leverage your financial ratios and make further borrowing costly or not possible.
· Maintenance costs are the responsibility of the owner.
While this is a very high level look at the items to consider, we can help you with this analysis and provide an apple to apple comparison of costs when we have a chance to see the offers that are available. In the ultra-competitive world we live in today, special incentives can make a world of difference in the true cost comparison, so every case has to be examined on its own merits.
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