Virtually every successful business reaches the point where new equipment—from computers to machinery to vehicles—becomes essential. But what if you don’t have the capital on hand to pay for those necessary items, and financing the equipment might not be the right option?
There is one popular solution for business owners in this situation—equipment leasing. In fact, the Equipment Leasing and Finance Association reports that 80% of businesses lease some equipment. Under the right terms, it can help a business with capital issues secure the equipment they need to stay competitive and grow. And even if a business has plenty of cash, leasing could still be the best choice.
The basics of equipment leasing are pretty straightforward: it’s an agreement that lets you lease the equipment you need—instead of buying it or seeking financing for it—in order to operate your business smoothly and efficiently. In that sense, it’s a lot like leasing a car.
You pay a monthly rate for a predetermined number of months, and once that lease ends, you can choose from renewing your lease, buying the equipment, or ending the lease and returning the equipment.
Leasing has its advantages and its disadvantages, of course. On the one hand, you’ll always have the most current equipment and regular equipment maintenance. On the other, equipment leasing is generally more expensive than buying outright in the long term. If you’re a new startup or a one-person business, you probably won’t benefit from leasing, but if your business is rapidly expanding, equipment leasing could be an excellent idea.
Let’s review 7 common scenarios where leasing might make more sense than buying.
Some companies can get by with using the same equipment for decades. Other businesses, especially in the technical space, are at a big disadvantage if their equipment becomes even the least bit obsolete.
Leasing instead of buying lets a business change out its equipment regularly. While it’s entirely impractical for most firms to buy new equipment every year or two, short-term leasing will usually allow you to equip your company with the latest hardware or machinery. If you’re looking for electronic or medical equipment, for example, a lease can often be the best choice for your business.
It’s just not always a convenient time to spend a ton of money upgrading equipment. If your company has other more pressing cash needs, then leasing equipment lets you push that money you’d spend on an equipment upgrade towards another, more urgent area of your business.
Because most equipment leases come with relatively low down payments (if at all!), leasing is often the best option for business owners who don’t have the cash to buy their new equipment outright. Plus, lease payments are usually significantly lower than the monthly payments attached to a business loan or a line of credit.
If your company is looking to upgrade its existing equipment but doesn’t have the time or inclination to sell it, a lease makes perfect sense. Plenty of equipment leases will offer credit on old trade-ins. This saves you the time and hassle of finding a buyer for your obsolete equipment—and often gets you a sizeable discount on your new lease terms.
Leasing equipment comes with some fairly serious built-in financial advantages: tax credits. Under Section 179 of the IRS tax code, leasing is often entirely tax deductible. The maximum annual tax deduction is currently set at $500,000, and business owners can deduct up to 100% of many leasing expenses, provided that they meet certain terms and don’t exceed the maximum cap.
If you’re choosing between taking out a loan and securing a lease, keep in mind that equipment leasing offers more flexibility when it comes to financing rates. Rather than a floating rate, standard with bank loans, leasing equipment gives you a fixed rate for the term of the lease. In addition, leasing provides 100% financing—which means that it can extend to “soft costs” like training, sales tax, and installation.
If you plan to keep the equipment for at least 5 years, purchasing or securing a loan is probably the better option. But if you don’t need the equipment for the long haul or you’re unsure whether it’s the right piece of equipment for your needs, it makes sense to lease it.
When it comes to buying or leasing business equipment, there’s no right or wrong answer—only right or wrong circumstances. If your business falls under one of the 7 scenarios outlined above, leasing equipment might be the smartest choice to make.