July 2008

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Should you lease or buy business equipment?

July, 2008

Manufacturing equipment, computer networks, fleets of automobiles, you name it — all can be leased. But is leasing always a good option? When does leasing make sense? When is it a poor alternative?

Lease types

Most leases for business equipment can be categorized as either operating or financial leases. With an operating lease (also called a "maintenance lease"), the company that owns the equipment (the lessor) is on the hook for maintenance. The firm that leases the equipment (the lessee) can usually cancel the lease under certain conditions.

With a financial lease, which is more common, your business signs a non-cancelable agreement to make periodic rental payments. Typically, you agree to cover maintenance, taxes, and insurance during the lease term. With a financial lease, the lease term often coincides — at least roughly — with the expected service life of the asset. So by the time the equipment is returned to the leasing company, it may be fully depreciated.

Lease or buy?

Does it make sense to sign a lease instead of buying the equipment outright? As with many financial decisions, it depends. On the plus side, with a lease your business won't need to take out a loan or make a down payment to use the equipment. That may be especially helpful if you own a start-up business that's struggling with limited capital. Also, when this particular piece of technology becomes obsolete (not if, but when), your firm won't be stuck with a dinosaur. The stuff can be returned.

On the other hand, leasing carries some distinct disadvantages. What if your firm leases a piece of equipment that retains its value and doesn't become obsolete in a few years? In that case, it might make more economic sense to own the equipment because you can continue to use it after it's paid off. Also, a lease is a long-term obligation. If your firm decides to modify operations, the leased equipment may go offline and sit in some dusty warehouse corner. Regardless, lease payments still need to be made. Consider also that taking out a business loan with a low interest rate may make buying the equipment cheaper in the long run.

As with any important business decision, the choice to buy or lease business equipment requires careful consideration. For help in analyzing the lease/buy decision for your business, give us a call.

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