Pros and Cons of Equipment Leasing
Equipment leasing is an attractive option for these purchases because it helps you relieve the strain on your resources that comes with a large, one-time expense. However, equipment leasing isn’t for everyone, so you should understand all the pros and cons.
In the post, we’ll explain the benefits and downsides of equipment leasing so you can make the best decision for business.
Pros of Equipment Leasing
1. Less Upfront Cost for Equipment Purchases
One of the most attractive benefits of equipment leasing is that the lease allows you to spread out the cost of your purchase. With a lease, instead of buying your equipment and owning it, you make payments each month to use the equipment.
The total cost will generally be less than what you would have paid to own the equipment. Plus, you make the payments incrementally, usually each month.
2. Easy to Upgrade to Better Models
It’s far easier to upgrade to better models when you lease equipment, especially if you’re careful about how you structure your lease. For example, let’s say you need some equipment, but you expect there to be a better model in two years. By structuring your lease so that the term is two years, you can easily trade in your old model and upgrade to the new one at the end of your lease. Also, with an equipment lease, because you don’t own the old model, you don’t have to worry about selling it.
3. Greater Flexibility than Other Options
Equipment leases are especially useful when you want to purchase equipment that you’re not 100 percent sure that you’ll need in the future. After all, you can’t predict the future, but sometimes you need things now that may not be useful later.
With traditional equipment financing, or purchasing the equipment outright, you run the risk of getting stuck with equipment you don’t need for years. An equipment lease gives you flexibility because if the equipment becomes unnecessary for your business, you can get rid of it whenever the lease ends.
Cons of Equipment Leasing
1. You Don’t Own the Equipment
Owning equipment comes with certain benefits such as tax savings. However, if you lease equipment, you may not get those benefits. Also, when you lease equipment rather than own it, the value of that asset is not on your books.
Of course, in some cases, this can be a good thing, but it may also scare off other lenders or potential investors because they see your lease as a liability.
2. You’re Paying Interest
While leasing equipment isn’t the same as an equipment loan, you’ll likely still have to paying interest. The average interest rates for equipment leases vary, but generally, you’re going to pay around a 5 percent APR.
Obviously, if you purchase the equipment outright, you can avoid paying interest, but you’ll face a potential disruption to your cash flow. In that case, it could be less expensive to pay the interest. However, that all depends on your business’s current financial situation.
3. Limited Accessibility for New Businesses
If you own a brand-new business—less than two years old — you may run into some difficulty obtaining an equipment lease. In many cases, this holds true even if you have solid credit and an otherwise good track record. If you are a new business owner and need an equipment lease, you may have to pay more upfront or provide other concessions to the lessor to get the deal done.
While the value of any given equipment lease depends on the terms and conditions, the most important thing to consider is your business’s financial situation. For example, even if you have plenty of cash, if the equipment you buy is going to be obsolete in a year, a lease may make the most sense.
Plus, even if a lease is more expensive in terms of total dollars, spreading the cost of that purchase may provide valuable flexibility for your business. As you can see, there are too many factors unique to your business for anyone to make a definitive statement either way in regard to whether you should lease.
Still, with a little self-evaluation and another glance through these pros and cons, you’ll discover the right solution for your business.
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.