Should I buy or lease my business equipment?

Cash flow and the expected life of the equipment are key in making your decision

5 minutes read

When it’s time to shop for equipment for your business, one of the trickiest questions can be whether to buy or lease.

Buying is usually cheaper over the life of the asset, but leasing generally requires less cash upfront, putting less strain on cash flow. Buying typically gives you more flexibility for altering or selling machinery if needed, while leasing may offer more options for keeping up to date with the latest, cutting-edge gear.

“Ultimately, what it comes down to most is what you value as a business owner and what’s going to work best for your short- and long-term goals,” says BDC Senior Account Manager Curtis LaButte. “Each entrepreneur has their own preferences, just like some people like to lease a new car every two years.”

Here is LaButte’s advice on buying and leasing equipment.

1. Start with the big picture

First, step back to think through your business goals, equipment needs and available resources. Get a clear picture of how the equipment will help you fulfill your business strategy and boost your performance.

Also take a look at your financial, human resources and cash flow projections.

  • How much can you afford to spend?
  • How tight or stable is your working capital?
  • What is your internal capacity to maintain, repair and upgrade the equipment and handle the training and integration needed to optimize its use?

2. Research your options

Gather details on all your options for buying and leasing the equipment. You should take note of costs such as:

  • the purchase price and down payment (if buying)
  • lease payments and end-of-lease purchase cost (if leasing)
  • tax impacts
  • insurance
  • financing
  • training
  • transportation
  • alterations
  • implementation
  • downtime during transition
  • maintenance
  • repair and upgrades

Some suppliers may be open to negotiations about costs and other terms, especially if they know you’re shopping around. Consult your accountant, insurer and bankers to get their input on costs, financing and any other implications of each option.

In most cases, it’s cheaper to buy up front than leasing to own. But if you’re in an unstable or fast-growing business, leasing may put less strain on cash.

Be sure to consider used and refurbished equipment, not just new. Also take note of other factors, such as warranty terms, balance sheet impacts and lease conditions on modifying and maintaining equipment and buying it at the end of the lease. Expensive equipment with longer lifespans generally has more leasing options.

3. Compare the numbers

With data in hand, you can compare all your options and weigh what’s most important to your business.

Evaluate each option by plugging the numbers into your cash flow projections, looking at the impacts of both the projected costs and income or savings from the equipment.

If equipment lasts only one or two years or you constantly need to upgrade it, you may want to lease. But if it lasts 10 or 12 years and needs very little maintenance, buying could be better.

If you have solid cash flow, buying equipment may be best because it typically comes with a lower overall cost of ownership. But if cash flow is tight or uncertain, leasing could make more sense. It doesn’t usually require a big upfront outlay and lets you spread out the cost with monthly payments over several years, with the option of buying for a reduced amount at the end of the lease.

“In most cases, it’s cheaper to buy up front than leasing to own,” LaButte says. “But if you’re in an unstable or fast-growing business, leasing may put less strain on cash.”

If you want the option of acquiring used or refurbished equipment, buying typically offers more possibilities. Leasing is usually only offered for new equipment. Also, buying tends to give more flexibility to do equipment customization.

On the other hand, leasing may be a better option if you have limited capacity for maintenance and repairs, which is often handled by the lessor. The asset’s lifespan is also a factor to think about.

“If equipment lasts only one or two years or you constantly need to upgrade it, you may want to lease,” LaButte says. “But if it lasts 10nbsp;or 12 years and needs very little maintenance, buying could be better. Once you understand the timeframe, the decision often becomes clearer.”

4. Mix it up

You don’t have to go all in for either option. It may make sense for your business to use a mix of leasing and buying a medley of new and used equipment.

“Some businesses lease new equipment for what customers will see, while saving money by buying used equipment for what’s in the back,” LaButte says. “You can use a flexible strategy adapted to your own needs.”