Buying Vs. Leasing
For small businesses needing to finance equipment, what's the best option -- a loan or a lease? It usually depends on the business' unique situation, but there are four key factors that should drive the decision-making process: length of ownership, cash flow, ability to obtain financing and tax advantages.
Length of Ownership
In most cases, a loan is the best fit if the business is looking for long-term ownership, which we classify as seven years or more. The equipment would be considered an asset and offer equity value.
On the flip side, a lease is a better fit if the equipment is for short-term use, which we classify as three years or less. This is often the case with technology equipment, that has the potential to depreciate rapidly, or for equipment needed on a project-basis. A lease provides the ability to upgrade equipment easily to meet your changing needs.
But what if you don't know how long the equipment will be in place? What if the useful life of the equipment falls between three and seven years? In these situations, the next three factors should be stronger driving forces.
The first step is to determine why you're financing the equipment. If you view the finance agreement as a short-term solution and want the ability to pay the equipment off early, a loan is clearly the best option.
But, if cash flow is tight, a lease may be a better solution (even if long-term ownership is the intent). With an equipment lease, there is no down payment, and soft costs -- such as installation and training -- may be rolled into the finance agreement. You'll have immediate access to the equipment with little-up front investment, thereby freeing up cash for other expenses and investment.
Ability to Obtain Financing
If you need financing for other reasons, you may have difficulty obtaining a loan for your new equipment. In that case, leasing can get you the equipment you need, and it doesn't restrict your ability to borrow additional funds because leased equipment doesn't have to show up on your balance sheet.
Tax advantages can also drive the decision to finance equipment through either a loan or lease. With both loan and capital leases, the equipment is depreciated as an asset. With all other lease options, up to 100% of the lease payment can be deducted pre-tax. For complete details and direction, consult a tax advisor.