If you are building a business or need new equipment for your company, you no doubt need to finance the equipment. Equipment financing is when companies use a loan or a lease to purchase or borrow physical assets for a company. Whether you need an oven for your restaurant, computers for your office, or a company car for the new CEO, you will probably have to finance the equipment. However, you have a choice between buying the assets or leasing them. Keep reading to learn the pros and cons of each and find out which option is best for you!
Should You Lease or Buy Equipment?
When you purchase equipment, you can pay the full costs up-front or take out a loan. All in all, buying equipment gives you full ownership of it.
- When you buy equipment, you own it instead of borrowing it. Taking full ownership of the equipment can be a huge advantage, especially if the product has a long life-span, won’t become outdated anytime soon, and won’t depreciate too much in value.
- According to Section 179 of the IRS Tax Code, all businesses that purchase business equipment during the 2019 tax year should qualify to write off the entire purchase price of qualifying equipment. This tax deduction can save you thousands of dollars.
- Because you have full ownership of the products, you have the option of selling the equipment when you are finished with it. In the end, you can recover some of the costs you initially spent on the products. In this way, purchasing products rather than leasing them is more of an investment into your company than not.
- There is a high initial expense. Even if you plan on taking out a loan to pay for the products, most banks require you to make a down payment of around 20%. You also need to make sure you are able to pay back the loan in the agreed-upon amount of time. Otherwise, your credit score could be affected and you won’t be able to take out future loans. Many businesses simply cannot purchase equipment because of the high costs.
- If you finance equipment that becomes outdated quickly, you are stuck with the purchase because you own it. Often, this is the case with technology. If it breaks down, stops working, or slows down, you have to make the decision to continue to use the poor-quality tools, repair them, or sell them at a lower cost than what you got them for.
- Likewise, you are responsible for maintenance. Depending on the equipment that needs to be fixed and the type of problem, it can be pricey to keep up with maintenance.
Leasing equipment entails making payments on products owned by a third-party company. Rather than pay one cost up-front, you usually make monthly or annual payments to use the equipment.
- Leasing can be easier to budget for because up-front costs are not as high as buying equipment. This can make equipment financing more affordable.
- You can easily keep equipment updated. Because you don’t own the products, you won’t be tied to them. In the end, you are better able to keep up-to-date on current technology and products you might need.
- Under the 179 IRS Tax Code, leasing is usually 100% deductible.
- Leasing offers more options. For example, you can easily choose the type of equipment you want without being restricted by the high up-front costs.
- You don’t have to pay for maintenance. If there are any issues with a product or if something breaks, the leasing company pays to fix or replace it.
- You don’t own the products.
- You will pay more money over time because you continue making payments on the products you lease.
- You are tied to a leasing company and thus have limited options. For example, you are tied to your leasing contract so you may be stuck with the equipment for longer than you need them for. Essentially, you are required to pay for an entire lease term, even if you stop using the equipment. Even if you are able to cancel the contract, termination fees apply. Additionally, it can be difficult to get things fixed because maintenance is up to the leasing company. They may not want to repair something, or it may take longer than expected to get products fixed.
- You cannot sell the equipment, so there is no chance to make that money back that you spent leasing.
So Should You Lease or Buy?
In the end, there are many pros and cons to both leasing and buying with equipment financing. Buying equipment has great tax breaks and allows you to own the products. However, high initial costs can make it difficult. On the other hand, leasing provides flexibility and preserves capital, but it will cost you more in the long run. In the end, the choice depends on your company’s circumstances and what your goals are. If you want assistance financing equipment, Charter Capital is the go-to company. They offer equipment and technology leases and loans that are tailored to your business’ specific needs. Contact them today for more information about how you can start financing equipment for your company today!