Equipment Leasing Versus Purchase - Which is the Right Choice for My Business?

No matter what type of small business you run, you will require some equipment. If you are a manufacturer, obviously production and materials handling equipment can be a huge part of your operation, but even a small scale service business or start-up consulting firm needs basic office equipment - computers, phone systems, even office furniture - and the question becomes - should I buy or lease?

According to the Equipment Leasing Association of America, 8 out of every 10 businesses in America currently lease rather then own the equipment they need for their offices, and the largest area of growth in equipment leasing is telecommunications and computer equipment. Small companies do not want to have to go out of pocket to pay the large price tag for the electronics that are needed to run practically every business today. And any budget conscious entrepreneur finds it hard to justify spending lots of money on gear that could be obsolete in less than a year. The main advantage of leasing is that it frees up cash. Equipment leases rarely require down payments, though you may have to set aside some cash for a refundable security deposit. By contrast, loans to finance the purchase of equipment typically require down payments of up to 25 percent or more. Not to mention the lengthy approval process for obtaining a loan. Equipment leases are fairly easy to obtain, either directly through the manufacturer of the equipment or through various on-line leasing companies that offer same day approvals. According to GCR Capital Equipment Leasing, one such company "Most small business owners aren't aware of the fantastic benefits a leasing company brings to the table by offering flexible, equipment leasing terms. Most have been misled into using unsecured credit lines as their primary financing vehicle. As you will find out, this is a dwindling spiral and a trap for business owners."

Since leasing does seem like the most attractive option when it comes to adding equipment at start-up or for growth of your business, the next thing you need to understand is that there are different types of leases, and you will need to determine which is the best for you. There are basically two types of leases when it comes to equipment: operating and finance.

• Operating leases usually last no more than five years. Typically they're shorter than the life of the equipment, because the lessee doesn't buy the equipment at the end of the lease but instead trades it in for an upgrade, making this the popular choice for high-tech equipment leasing.
• Finance leases are your "option to buy" lease and usually result in the lessee buying the equipment when the lease is up. These leases are typically spread over a longer period of time, which reduces the monthly payments.

There are different tax advantages one gets with each type of these leases. In an operating lease your payments are considered operating expenses and can be deducted as such. For tax purposes a finance lease is considered a debt, and therefore the depreciation in value of the machinary or equipment may be deducted, which is another reason why the finance lease is attractive for leasing large ticket or heavy equpiment like say for a medical practice or contruction company.

So does it ever make sense to buy? While leasing equipment seems to be a growing practice among business owners, it can have it's draw backs. One being that once you opt into a lease, you are pretty much locked into it, even if two or three months down the line you realize you no longer need that piece of equipment, you are likely going to have to pay the full term of the lease. Futhermore, with a lease you will always pay more in the long run- a $4000.00 piece of office equipment leased at say $160.00 a month for three years will come to $5760.00 over the course of lease as opposed to the $4000.00 to buy outright. Also most financial advisors will recommend that if you need to purchase a large piece of equipment that you know is not going to be outdated in the next 5-10 years, it probably makes more sense in that case to buy rather than lease. Experts agree that the best advice is to carefully evaluate your needs short and long term when it comes to every piece of equipment you are thinking about adding, and then the question "should I lease, or should I buy?" will be much easier to answer.