Buying expensive equipment for your business ties up money that can be better used for daily operations. There are two common alternatives to buying. The first is leasing, which is like renting your office space in that you pay a monthly fee to use an asset that you never own. The second is financing, which breaks up your purchase price into monthly payments that include interest. When you have finished all the payments, you own the asset.
Here are five reasons why financing is better than leasing.
The best thing about financing equipment is that the payments stop eventually but you still end up owning the equipment, which you can continue to use. With leasing, you will continue to pay as long as you want to use the item. And while those payments may seem small, they do add up to larger amounts over the life of the lease. This typically makes leasing far more expensive to your business.
Financing equipment is generally straight-forward with the down payment, monthly payments, interest, duration, and total payments laid out in a comprehensible contract. Leases typically involve such additional complexities as market value, tax responsibility, late fees, maintenance costs, equipment use fees, cancellation provisions, renewal options and equipment return costs. Something could go wrong with any of these additional parts, so you have to keep track of all of them to ensure that problems or liabilities don’t develop for your enterprise.
Leases come in two flavors: capital, which eases into ownership, and operating, which is similar to a rental with an option to buy at the end, making this type of lease less expensive. However, the Financial Accounting Standards Board is modifying the criteria for what qualifies as an operating vs. capital lease. In short, businesses must take into account assets and liabilities for operating leases with terms over 12 months. This change produces tax complications that are best handled by your CPA.
In the old days, maintenance and repair of leased equipment fell to the lessor and not your business. However, such arrangements have become uncommon. Instead, you’re typically in charge of keeping leased machines well-maintained and must repair them on your own dime if problems develop.
If you own something, even if it is financed, you can typically sell it if you no longer want it or require the proceeds to complete your payment obligations. Trying to do that with leased equipment can be difficult or impossible, or may involve expensive termination fees. If you decide to lease, make sure to scrutinize any “escape clauses” that may allow you to get out of your obligations if you encounter problems.
Need more information on financing or do you want to get started on buying some business equipment? Please contact us at MY Company Funding.