To Buy or Not to Buy? Part 2 of our Series on Buying vs Leasing Equipment

March 5, 2009

During uncertain economic times, every decision requires that much more contemplation and research.  You may have caught our last article where we discussed the ins and outs of leasing equipment.  Well, here’s the other side of the argument:  Buying.  For those just digging into the business world – or upgrading existing operations – here’s some information on the world of equipment purchasing to help make those decisions a bit more certain.

Buying Advantages

Business Equipment can be written off

Tax interpretations are best left in the hands of professionals, of course, but remember that it’s worth your while to research how to best maximize your investment.  Many business purchases warrant a tax break of some kind, and there are more opportunities to save than you might think.  Use the tax laws to your advantage and you’ll reap the benefits of that long-term purchase.

Maximize Use

Leases are risky because you’re at the mercy of the leaseholder.  Changes to your lease can happen suddenly and without warning, leaving you in a compromised position or forced to return your equipment.  Buying creates more stability because the terms of your deal won’t change – you made the arrangement because it’s what you could afford and it worked best.  You’re more in control of your own fate.

Renting and re-selling

Owning your own equipment means that it’s potential to make money is twofold – it makes money when you use it, and acts as collateral in case you wish for it to be sold.  Buying means that you can build equity on your equipment.  With leasing, you’re paying but have limited power using it to earn back your investment.  As an extra precaution, you can reap some sort of return because it has value to be re-sold or rented.  If leasing is paper money, than buying is gold.

The long haul

Buying has an advantage over leasing if you know you’re going to keep the equipment for a long time.  Some purchases you just know this is going to be the case.  Once you pay everything off, it continues to make money as long as it is being used in some profitable way.

Lower overall costs

This article quotes Denis Dummer, Public Affairs Officer for Industry Canada, talking about how buying means your overall payment will be lower:  “Expect to pay a lower monthly payment when you lease, compared with what you would pay on a loan for the same vehicle.”  He also cites another tax advantage:  “You pay tax only on the monthly payment rather than upfront for the full price of the vehicle.”

Modification

If you need to alter your equipment in some way, in terms of servicing or maybe to make it fit better, you have the independence to do so.  You can’t do anything drastic to your leased equipment; otherwise you’ll probably end up owning it whether you had intended to or not.

Buying Disadvantages

Higher up-front costs

One glaring disadvantage of purchasing outright is that you have to pay substantial up-front costs to secure your equipment.  Attorney Fred S. Steingold, author of the Legal Guide for Starting & Running a Small Business writes onnolo.com:

“For some people, purchasing business equipment may not be an option, because the initial cash outlay is too high.  Even if you plan on borrowing the money and making monthly payments, most banks require a down payment of around 20%. Borrowing money may also tie up lines of credit, and lenders may place restrictions on your future financial operations to ensure that you are able to repay your loan.”

Buyer beware

The rate of depreciation on equipment – especially technology – can be steep.  Steingold says that “although ownership is perhaps the biggest advantage to buying business equipment, it can also be a disadvantage. If you purchase high-tech equipment, you run the risk that the equipment may become technologically obsolete, and you may be forced to reinvest in new equipment long before you had planned to. Certain business equipment has very little resale value. A computer system that costs $5,000 today, for instance, may be worth only $1,000 or less three years from now.”

Ultimately, it’s your call

Since we at Industry Blender believe in not only providing members with our own argument, but also helping lead our members to the sources – here is a toast to all you empowered Decide-it-Yourselfers.  These websites provide easy to use platforms for crunching your own numbers.  Just fill in the blanks.

Here’s an interesting business-oriented website that offers a buy vs. lease calculator to give you an idea of which option is best for you.

This one is more business-centric calculator and website that has great definitions for relevant terms.

Good Luck!

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