When it’s time for your business to acquire new equipment, one question that invariably surfaces is whether to lease or buy the equipment. Before that question can be properly answered, the first step is to understand what’s actually involved in both options.
When making this decision, accountants and financial managers often turn to a mathematical equation that seeks to distill the decision into purely financial terms. Although this can be a useful exercise, basing a lease/purchase decision on this type of analysis alone might be a mistake.
For one thing, leasing is a very complex topic. Formally, a lease can be evaluated in three distinct disciplines:
- As a legal contract
- As a tax strategy
- From an accounting perspective
Professional practitioners in each of these areas look at a business equipment lease from different points of view, all of which are important, but none of which take into account all facets— financial and non-financial—of leasing.
With this in mind, as a business owner, manager or executive who is in the process of acquiring equipment and deciding whether to lease or buy, the first step should probably be to talk to your legal and financial experts. From there, however, it becomes a business decision, and this is where a solid understanding of the principles of leasing comes into play.
First and foremost, the fundamental conceptual differences between leasing and buying are important to understand. For example, when a business purchases equipment, it owns the asset outright, along with all of the benefits and problems that come with it.
Some businesses prefer the theoretical “security” of owning equipment instead of what they perceive as renting it, but the reality is that if the equipment is financed with a loan instead of a lease, the lending institution still retains title to the equipment, so the business doesn’t really own it after all.
In a lease, the business is actually paying only for the value received from the equipment in use. At the end of the lease, the equipment still has value—called the residual value—that is factored into the payment schedule.
But paying only for what you use is just one important benefit of leasing. A lease is inherently flexible, allowing the business to upgrade to new equipment at any point during the contract. The process is typically very simple and requires little more than a phone call and the execution of some simple documents, most of which is handled directly by the leasing company.
Replacing owned equipment on the other hand requires finding a buyer, selling the equipment—often for less than it’s worth—paying off the loan and so on. It’s a somewhat complex, time-consuming process.
Apart from the fundamental benefit of paying only for what you use, leasing offers other significant benefits. Purchasing equipment outright has the obvious negative effect of reducing cash. On the other hand, all a lease typically requires is one or two monthly payments up front and that’s it. Many times, no down payment is required at all. In other words, leasing conserves precious cash. Further, since a lease is a separate contract, it does not affect any existing lines of credit that a business might already have in place.
One of the best ways to look at the difference between buying and leasing business equipment is by comparing the difference between a transaction and a relationship. Taken to the extreme, a transaction can be completed in an hour or so, but a business relationship can last a lifetime. For a business acquiring equipment, that can be an important distinction.
Once an equipment purchase is completed—a transaction—the business quite often finds itself on its own. An equipment lease is different. With leased equipment, a business creates a much longer term and an ongoing relationship with the leasing company. Since most leases include provisions for service and support, the leasing company has a vested interest in making sure the equipment is always working and that you, the customer, are always happy.
These benefits, even though they are not entirely financial in nature, are nevertheless valuable and should absolutely be considered as a part of the lease/purchase evaluation. The takeaway here is that leasing is a very powerful means of acquiring needed equipment—both new and used—as well as software and related services.
Leasing can help you to extend your capital resources, while acquiring the equipment that business needs to expand or become more profitable. Properly deployed, leasing can be transformed from a simple procurement method into a powerful strategic advantage.