Nearly every industry requires equipment to properly function. In addition to restaurants, construction firms, office-based businesses, medical firms, and manufacturing companies also require significant equipment in order to operate.
Although equipment is necessary, it doesn’t mean that it’s affordable, and many businesses struggle to purchase equipment without some sort of financial assistance. Due to this, many business owners turn to equipment leasing in order to obtain the equipment they need. In this post, we’ll explain what equipment leasing is and how you can determine if it’s the right funding option for your business.
What Is Equipment Leasing?
Equipment leasing is an attractive funding option because it helps you relieve the strain on your resources that comes with a large, one-time expense. However, business 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 your small business.
What Are the Pros and Cons of Equipment Leasing?
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 monthly payments to a leasing company 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 lease 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 rental agreement.
For example, let’s say you need a certain type of medical equipment for your doctor’s office, but you expect there to be a better model in two years. By signing a leasing agreement with a two-year term, you can trade in your old model and upgrade to the new one at the end of your lease. In addition, because you don’t own the old model, you don’t have to worry about selling it.
3. Greater Flexibility than Other Financing Options
Equipment leases are especially useful when you want to purchase a piece of equipment that you’re not 100 percent sure that you’ll need long term. For instance, a type of equipment that you need now might not be required down the road if your services change.
With traditional equipment financing, or purchasing the equipment outright, you run the risk of getting stuck with equipment that you only need short term. With most types of equipment leases, you’ll have flexibility to get rid of equipment that becomes unnecessary by the end of your lease term.
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 make interest payments during the course of your lease. 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 addition, you’ll responsible for paying repairs and other maintenance costs.
Due to these expenses that come with purchasing equipment, it could be less expensive to pay the interest on a lease. However, that all depends on your business’s current financial situation. Before committing to a lease or loan, you should compare the costs associated with both options.
3. Limited Accessibility for New Business Owners
If you own a brand-new business, you may run into some difficulty obtaining this type of lease. In many cases, this holds true even if you have a solid credit history and an otherwise good financial 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. Due to this, it might not be worthwhile for you to pursue an equipment lease. If possible, you should try to wait until your business has been operational for some time, then pursue equipment financing options.
Is Equipment Leasing Right for Your Business?
While the value of any given equipment lease depends on the lessor’s terms and conditions, the most important thing to consider is your business’s financial situation. For example, even if you have plenty of cash flow, 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 in the future.
As you can see, there are too many factors unique to your business for anyone to make a definitive statement either way regarding whether you should lease. That’s why seeking council from a financial advisor or mentor could help your business make the most responsible decision possible.
Still, with a little self-evaluation and research on the pros and cons outlined in this post, you’ll discover the right solution for your small business. Also, remember that there are other working capital options available that you can use to acquire equipment. These options include small business loans, lines of credit, business credit cards, and cash advances.
Editor’s Note: This post was updated for accuracy and comprehensiveness in March 2021.
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.
