Should You Lease Or Buy?
 By B.J. Addington

Lease equipment or buy it outright? Small-business owners weigh that question everyday. Here’s information to help decide which answer might be right for you.

When interest rates are high, relatively lower lease payments generally offer a clear short-term benefit over the outright purchase of equipment. But if interest rates fall, the gap between purchase and lease payments narrows, and that advantage lessens.

Nevertheless, there are several other factors you should weigh when determining whether your circumstances make leasing or buying the better option.

Generally, leasing offers these advantages over the outright purchase of equipment and other assets:

• Lower lease payments free cash in your budget for other important uses, such as expanding advertising, production or operations.

• If your customers demand you be on the cutting edge, leasing makes it easier to have up-to-date equipment and avoid obsolescence.

• Usually, you don’t have to worry about insuring or maintaining the equipment. The leasing company will.

• Usually, you pay little (or nothing) upfront to acquire the equipment, unlike substantial down payments required for purchases.

• Banks view most lease debts differently than purchase debts, so they don’t adversely affect your borrowing power.

• Purchased equipment, once paid off, often is regarded as free because monthly payments no longer are being made. However, maintenance, repair and insurance costs continue, which are generally avoidable when leasing.

• The length and terms of lease agreements can be more flexible than purchasing.

• You don’t have to pay the full cost of an asset to have it and use it.

• Lease payments are deductible business expenses.

On the other side of the coin, purchasing equipment has these advantages:

• Total costs, even including financing charges, can be less over the lifetime of the purchase than for the same period when leasing.

• Purchases are generally simpler, more straight-forward contracts.

• The full cost of assets like office equipment generally is deductible in the year of purchase.

• You build an equity value in purchased assets, which you don’t with leased equipment unless you acquire it at the end of the lease.

• Conditions imposed at the end of many leases sometimes result in surprise costs for business owners who paid scant attention to such details when the lower monthly payments lured them into signing the contract.

Complicating your decision are myriad leasing options.

For example, full payout leases spread out payments that equal the total cost to acquire the asset, much like purchase payments do. At the end of the term, you may have the option of taking ownership for as little as $1.

By comparison, a fair market value lease offers lower payments, but the equipment retains a significant portion of its value at the end of the term. In that case, you have the option of ending or renewing the lease, or buying the equipment for its remaining fair market value.

In addition, a financial lease may not be cancelled and remains in force for the life of the equipment, which can be as long as seven years. You can be responsible for insuring and maintaining that equipment, even though the leasing company retains ownership.

An operational lease by comparison usually is for a shorter term, as brief as a few months, while ownership, insurance and maintenance responsibilities remain with the leasing company.

Renting equipment is similar to short-term operational leasing. Although lease payments tend to be smaller than rental payments, leases generally are not cancelable, while rental agreements can be.

Purchasing generally doesn’t offer the cash-flow advantages of a lease, or the ease of upgrading to newer equipment, or the ability to easily keep abreast with technological advances. And when you buy equipment outright, you are obviously the one responsible for maintaining and insuring it.

Depending on the size of the purchase price, purchases can be financed over many years, or paid off quickly, or even all at once at the time of purchase. Plus, your maintenance and insurance costs on purchased equipment are deductible expenses.

At the end of a purchase, you own the asset and can sell it or rent it to someone else. At the end of the lease, you may or may not be able to acquire the asset without additional expense.

(Posted May 2006)

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