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Business equipment – buy or lease?

Weighing up the options

Many small business people wonder whether it’s better for them to buy or lease l equipment for their businesses. Your options really depend on the nature of your particular business, but there are nevertheless a few guidelines you can follow to help you decide what you should do.

If you have the money available, and the item is really necessary to your business, then it will usually benefit you to buy it outright. If there’s no way you can find the finance (i.e., you have no money) then you’ll have to finance the purchase out of cash flow, which means leasing it.

A small caution: don’t buy an item at the risk of not being able to meet your bills in the next month. Only use surplus cash – and then only if it really is ‘surplus’, not just temporarily in the bank account. Questions to ask yourself

When it comes to deciding whether to lease or buy, there are things to decide:

  • How often will you use it? If it’s only going to be used every now and then, there’s no real point in buying one. It will lie around for most of the year unused and be a waste of your resources. So lease or hire the equipment when you require it.
  • What else could you do with the money? Could you earn a better rate of return on the capital required for the item if you invested it in your business? Your business might be at the stage where a few thousand ploughed back in as working capital will give you a far better rate of return than tying up the money in equipment.
  • Will the asset become outdated in the near future? For example, signing a five year lease on a computer that will become obsolete in three years doesn’t make much sense?
  • Is it cost effective? Will the extra business you make cover the expense of leasing or purchasing?

When you lease an asset, you’re simply renting it for a set period of time. The leasing company retains ownership of the asset while your business has the exclusive use of it for the term of the lease.

A lease will typically run for anything between 24 and 60 months. Once the agreement is entered into, both parties are obligated to see out the term of the lease.

Throughout the course of the lease agreement, you’ll pay regular instalments for the right to use that asset. For accounting and bookkeeping purposes, some leases can be classified in the same way as an asset purchase and can be capitalized on your balance sheet.

However, purchasing your own asset can be a cheaper option in the long run. For example, if you lease a $200,000 piece of machinery on a regular basis over a long period of time, you could find you’ve spent more than the purchase price.

Help and Resources

Contact one of our Small Business Advisors for advice on buying or leasing equipment.

Speak to us about customized leasing solutions from Meridian OneCap, if you are looking to sell equipment or lease equipment.