Lease Vs. Buy Comparison for Capital Equipment

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Capital equipment acquisition agreements.
Capital equipment acquisition agreements. (Image: writing image by Horticulture from <a href='http://www.fotolia.com'>Fotolia.com</a>)

Deciding whether to lease as opposed to buying capital equipment requires some analysis and determination of what the overall goals are for the business and for using the capital equipment. Relying solely on the recommendations of the person selling the capital equipment is a mistake, because salespeople are often driven by which alternative will make the most money for them, as opposed to what makes business sense from the perspective of the business that will be using the equipment.

Significance

One of the key factors in deciding if one should lease versus buy is cash flow. If a company is flush with cash, buying is the best option since leasing equipment ultimately costs more money. However, if a company wants to conserve capital in the near term, the leasing option is often chosen.

Types

According to Enterprises Financial Solutions, there are 15 different types of leases. One common type of lease is an operating lease, which is appealing to organizations that anticipate holding on to equipment until the end of the lease term. Maintenance, taxes and insurance are paid by the leasing company.

In contrast, with a finance lease, the organization leasing the equipment is responsible for maintenance, taxes and insurance. One financial advantage of a finance lease is that the leased equipment is considered “owned,” and equipment costs can be treated favorably from a tax perspective.

Advantages

One advantage of leasing is that the initial expense is less. For this reason, leasing is often chosen for new projects or equipment that takes a long time to begin producing revenue for a company. Another advantage of leasing is that these payments can be used as a tax deduction, making leasing on a net after-tax basis cost less.

Leasing is appealing to organizations requiring special financing because a lease agreement can be structured in multiple ways. If the capital equipment being purchased is frequently updated by the supplier, leasing affords an easy way to upgrade the equipment to the latest version--even before the lease ends.

Disadvantages

Leasing does not make sense for everyone because, although the payments seem appealing to many companies, total costs are higher for leasing than for an outright purchase. In addition to the overall costs being higher with a lease, leased capital equipment is not owned by the buyer. If the buyer changes the way the business is operated and the leased capital equipment is no longer required, the equipment can’t be sold.

Warning

Before deciding if capital equipment should be leased or bought, several people representing different functional areas of a business should be involved in the decision-making process. This includes operations, maintenance and finance. If the expenditure is a significant one, consulting an independent leasing expert is advisable.

For example, as Adept Science explains, a financial person might use the net present value of cash flows to decide if a lease should be signed or if capital equipment should be purchased.

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