A question many business owners ask bankers over the course of operating their business is whether they should borrow money to buy or should they lease capital equipment. There are advantages and disadvantages for each choice, but when all things are equal, one of the deciding factors in deciding whether to borrow or lease is timing. One year a business might find that it makes sense to lease and another year it might be more advantageous to own. Generally speaking, these are things business owners need to consider when deciding whether to lease or buy.
Advantages of Borrowing to Buy
- You build equity in the piece of equipment that you’re buying.
- There will quite possibly be tax incentives through Section 179 or the Internal Revenue Code for buyers. Talk to your accountant to be sure.
- You might be able to use a depreciation deduction on your business taxes. Once again, check with your accountant.
Disadvantages of Borrowing to Buy
- You will have a greater initial expense, even if it is just a down payment.
- When the equipment is old, you run the risk of being stuck with it.
Advantages of Leasing
- The initial expense is less than buying, which allows money to be used in other places to grow your business, or simply to add financial stability.
- Lease payments can usually be deducted as business expenses on your taxes. As always, consult with your accountant.
- It is usually easier to upgrade equipment when you have a lease which will allow you to easier replace equipment before it is obsolete.
Disadvantages of Leasing
- The overall cost is higher. Lease payments are higher than a loan with interest, usually because the owner has future replacement costs built into the lease.
- You don’t own it which can affect taxes negatively.
- Early termination costs can be much higher for a lease than paying off a loan early.
Summary
Ultimately, each business will need to make its own decision about whether to lease or buy. The net cost of having the equipment as an asset should be considered, as well as how taxes for buying and taxes for leasing will be effected. Then, once the overall cost and the effect on taxes is considered, determine when the item will likely be obsolete, and how easy it will be to unload the older equipment when new is purchased. The ramifications for buying or leasing can have a major impact on a business’s future.
When Bankers need to price loans under a variety of what-if scenarios; a loan pricing model can quickly provide the comparisons. For more information on loan pricing models , an please don’t hesitate to contact us.