Lease vs Buy: Which is Better for Your Small Business?

Arla Wallace is an accounting professional with over 20 years experience. She spent several years working for both publicly-traded and private entities before founding her own business. Today she partners with small business owners so they can focus on operations while leaving the responsibility of staying on top of accounting tasks to her. She is a Certified Public Accountant (CPA) and a Certified ProAdvisor for Quickbooks Online.

Lease vs Buy: Which is Better for Your Small Business?

Equipment, vehicles, facilities--large ticket items are just one type of expense a small business owner will have to manage. Coupled with hidden fees, such as taxes, delivery charges, installation fees, and routine maintenance, purchasing an asset can prove costly. Financing options, including business loans and leases are available to small businesses that are in the market to acquire a new asset. However, proper planning by a business owner is necessary to find the best decision for each large ticket purchase.

Leasing

Leasing equipment, a vehicle, or even a building can yield several advantages. First, leasing generally equates to a lower initial investment. Since payments are spread out over several years, there is no significant outlay of cash related to leasing. In addition, by paying only rental expense, a small business owner can invest in better quality, even more expensive assets. Depending on the industry, the risk of asset obsolescence may be of concern. Leasing can decrease this risk, as upgrading is made easier with replacement options. Moreover, lease payments are treated as operating expenses for the business and interest is tax deductible.

Leasing does present some disadvantages for small business owners. Although owning an asset is not without risks, both control and ownership are surrendered with leasing. In addition, while lower monthly payments spread out the costs of leasing over a set period, leasing requires interest payments that can result in paying more for an asset than if it was purchased. Should the business owner decide the asset is no longer needed, one cannot get out of a lease agreement. Rather, monthly payments will continue unless a lump sum is paid to settle the remaining balance owed.

Buying

Ownership of an asset has its benefits. A small business can continue to use a purchased asset for as long as it remains productive or the asset can be sold when any loans are paid off. Although leasing companies are typically against customization of an asset, purchased or financed assets can often be tailored to meet small business specifications. Furthermore, under Section 179, the IRS allows small business owners to deduct the cost of some purchased assets in their first year. And, if the asset does not qualify for Section 179 tax treatment, a business may still be entitled to tax benefits through depreciation deductions.

Purchasing or financing an asset is not without risk. A small business can have a huge initial outlay of cash or borrowed funds may result in lender restrictions. Additionally, an owned asset can become obsolete or have very little resale value when a business is ready to dispose of it. There are also maintenance costs associated with a purchased or financed asset. Routine inspection and maintenance of assets decreases the chances of business disruptions to both productivity and scheduling.

Conclusion

There are both pros and cons to examine when acquiring a new asset. Careful consideration of cash flow, taxes, and useful life of the asset will help small business owners determine when to lease and when to buy.