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Should you lease or buy your business equipment?

A growing number of companies, especially small businesses, are choosing to lease rather than buy business equipment. Many find that doing so can have a substantial impact on the value of their businesses.

Before deciding to buy or lease, familiarize yourself with the following points, and consider getting the advice of a professional, such as your accountant, lawyer or qualified financial advisor.

Why lease?

A lease doesn’t tie up working capital, usually doesn’t require a down payment or collateral. Instead of financing the full purchase with a loan, you’re paying the amount the equipment is expected to depreciate during your rental term (typically from six months to six years). You make monthly payments to a leasing company. At the conclusion, you usually have the choice of buying the equipment, returning it, or extending the lease.

When to consider leasing

You may want to consider leasing if you:

• Have a limited amount of working capital or wish to use it for other purposes.
• Need equipment that is prohibitively expensive or likely to quickly become technologically obsolete.
• Want to obtain equipment quickly, without the paperwork associated with a loan application.
• Want to take advantage of tax benefits. Lease payments are usually 100 percent deductible as an operating expense and may be deducted on a monthly basis. Loans are not tax deductible, although interest and depreciation expenses are.

Ownership has its privileges

Ownership can potentially provide long-term cost savings, trade-in value and the option of keeping your equipment for as long as you want, if you:

• Have enough working capital or a line of credit available.
• Prefer not to be locked into a lease agreement that could penalize you for early termination.
• Want to have the option of selling your equipment.
• Don’t want to increase your debts (if you use your own capital to purchase equipment).

Read the fine print

As with any contract, study the terms of different lease options:

• Operating leases usually feature a term that is shorter than the expected useful life of the equipment – good for equipment you’ll need to periodically update.
• Finance leases are usually used by firms that want to own the leased equipment at the end of the lease term.

Find out more

The American Express website for Small Business Services offers guidance on equipment leasing. For more helpful tips, visit the Equipment Leasing Association’s Educational website.

May 17, 2001

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