Business owners must make numerous decisions that affect daily operations. One thing an owner may find he or she needs to decide is whether it is best to lease equipment or if the necessary items should be purchased and financed. Knowing which option is appropriate in any given situation can be difficult, as there are benefits and drawbacks to each. The following are some things a business owner should take into consideration when making a decision to feel comfortable with their choice.
Equipment leasing provides many of the same benefits seen with the outright purchasing of equipment with the help of a loan through a company. However, the major difference between the two options is when equipment is leased, the lender or the lease provider is the one who takes on the purchasing of the tools. This lender then rents the equipment to individuals or companies for a monthly fee.
The lessee pays the lender this fee along with interest, allowing him or her to know how much the monthly payments will be. Once the lease term ends, the lessee may be given the option of buying the equipment at fair market value or for a predetermined fee. Additionally, the borrower often has some control over the length of the lease term. This allows for more options when it comes to upgrading equipment that may wear down prematurely or become outdated in a short period of time.
Business owners often choose to lease equipment that tends to become obsolete quickly or items that sustain a great deal of wear or tear. By leasing these items, the business owner can upgrade regularly and ensure his or her operations continue smoothly. One benefit to consider when determining if a lease is a right option is that the lease does not appear on the company’s credit report as a loan. Therefore, the business will find other lines of credit remain available for use. In addition, the payments are typically reported on the company’s credit report, and timely payments can help improve one’s credit score.
By opting to lease, a company can reserve funds for other expenses. This may include payroll, training for employees, or numerous other business expenses that cannot or should not be delayed. The lease offers more flexibility than a traditional loan.
Nevertheless, a company that doesn’t have good credit could find it is charged a higher interest rate for the leasing of equipment. This needs to be factored into the decision-making process as well. The company might find they run into a similar issue when attempting to secure a loan for the purchase of the same equipment though. Why should a business consider a loan as opposed to a lease when the time comes to obtain new equipment? What are the benefits of buying outright?
Equipment that does not need to be frequently updated is often purchased outright. This type of loan is typically easy to qualify for, as the lender knows the funds will be secured by the equipment being purchased. In the event the borrower does not pay as agreed, the lender can take action to take possession of the equipment. He or she is taking on less risk as a result. In situations such as this, the company obtaining the equipment is usually not required to provide any additional collateral. The lender ensures the equipment being obtained will cover the funds they are providing so they won’t lose out if the borrower defaults.
The amount of money that can be borrowed for this purpose typically depends on the type of equipment being purchased along with its condition. Is the equipment new or used? The interest rate paid is often based on whether a new item will be obtained or if second-hand equipment is to be purchased. Borrowers need to recognize this is only one thing a lender takes into consideration though when determining whether to provide the funds along with the interest rate that will be changed on the funds being provided.
However, a company might find that technology advances at a rapid rate and the equipment they are still paying on are now obsolete. In cases such as this, the company might find they are paying on a piece of outdated equipment as well as equipment that can be used to continue operating the business at the same time. This can drain the company’s budget in a short period of time. As a result, business owners need to determine which items should be obtained outright and which ought to be leased.
Nevertheless, companies appreciate having this option as they can obtain the equipment they need to run the business without having to come up with the entire purchase price upfront. In addition, financing equipment provides tax benefits for businesses. This needs to be factored into the decision-making process, although business owners might find they can deduct lease payments as well. It’s best to speak to a tax professional to learn what expenses may and may not be deducted on the company taxes each year.
Which is Best?
As seen by the above descriptions, what works for one company may not be appropriate for another. Take all factors into consideration when determining if you should lease equipment or buy it outright. Some companies now find using a combination of the two methods is most appropriate for their needs. There is no right or wrong answer, as each business is unique. Keep this in mind when comparing the two options to choose the one that is right for your organization.
Furthermore, be sure to compare companies when choosing who to work with. The choice of provider can be a key factor in how satisfied the company is with their choice. It’s always best to compare a minimum of three providers if not more. By taking the time to research the various options, every company can discover the solution that best meets their specific needs. What works for one organization might not be suitable for another, which is why having the options of both leasing and purchasing outright is greatly appreciated by company owners everywhere.