By Roger Wood
The decision to buy or lease the equipment required to run your business each comes with its own set of advantages and disadvantages. The matter is too complex to say that one option is superior to the other in every situation. Rather which option is best depends on the type of equipment that you need, as well as how the equipment is incorporated in your overall business plans.
Given that these are both large topics, let’s break them down into smaller questions that business owners should ask themselves if they are deciding whether to buy or lease their commercial equipment.
1. How much capital do I currently have?
This should be the first question you ask yourself when making any financial decision. Acquiring equipment for your business is no exception to this rule. Buying a load of equipment in order to deliver a service is no good if you do not have the money leftover to market your services, pay your staff, and to cover all your other costs.
Purchasing equipment outright is a risk. While you might be rewarded with lower overheads down the line, the immediate stemming of your cash flow with such a large one-off payment could put the brakes on your business’s growth.
Therefore, if the money required to buy equipment outright puts a major dent into the budget reserved for other areas of your business (particularly customer acquisition) then leasing may be a better option. Even though it is usually more expensive overall, leasing gives you more money to fund short-term growth. It is generally a better option for businesses lower, or less stable, revenue.
2. How regularly will my equipment need to be upgraded?
When you buy equipment, you pay the same regardless of whether it delivers value to your for 20 months or 20 years. With leasing, you pay a little extra over the same period to be able to be a little more flexible with timeframes.
Plan your lease accordingly, and you could get away with paying for items for only as long as you need them. This could, in certain situations, see you paying less overall than buying. To plan a lease strategically you need to know:
- How quickly innovations to the equipment in question occur
- The rate at which your equipment will suffer the effects of wear and tear
- How newly released features of certain piece of equipment can benefit your particular business
A further factor to consider is whether you are more likely to want to replace or update your equipment when it comes to the end of its shelf life. Whereas leasing gives you a lot of freedom when it comes to replacing equipment, it may not allow you to add bespoke features to what you already have.
If you own your equipment, it is completely up to you how you use it. This includes any customizations that you may want to make. If you know the technology that underpins your equipment inside out, and you feel that you can gain a competitive advantage though creating a bespoke tool, then ownership may be preferable to leasing.
If you are still experimenting with what tools work best, than leasing is the way to go.
3. What role does this equipment play in my business?
Again, because purchasing involves bigger risk than leasing, its better to only purchase equipment that you know will play a central role in your business. If you use something every day, and its absolutely essential to what you do, then it is likely that a purchase will pay its dividends over time.
If the equipment in question is being acquired to try and increase your portfolio of services, or just to experiment with new technology, than a short term lease would be better to find out its value before you take such a big financial risk.
You can always purchase the equipment outright later on once you have established that the commercial benefits are there.
4. Am I more focused on growth or profit?
Leasing is generally more suitable for businesses focused on growth. Leasing gives you the tools for growth, high quality equipment without denting your cash flow. This comes with the downside of increasing your operating costs and therefore reducing your scope for profit in the near future.
Purchasing does the exact opposite. Taking the cash flow hit may reduce your ability to acquire new business in the near future, but it will allow you to maximize the profit margin on whatever your current activities.
Your current business goals should therefore inform your decision to buy or lease.
5. Am I thinking about selling my business in the near future?
Your business will be more attractive to buyers if you own your equipment. Quite simply, if your equipment is owned, buyers are getting more for their money. Leased equipment adds to your operating costs, and therefore lowers the value and attraction of your business to buyers.
Therefore, if you are preparing your business for market, even if its only 5-10 years down the line, it might be wise to purchase and own your core equipment.
Featured photo credit: Depositphotos
Good points to consider Roger! I think another to consider is if a certain piece of equipment is used often enough to justify purchasing it instead of renting it for the one specific job.