Pros and Cons of Leasing/Renting Equipment
Despite being important, equipment is not always economical to purchase, and many businesses find it difficult to do so without outside funding. As a result, many business owners choose equipment renting or leasing to get the necessary machinery. Here we’ll outline the advantages and disadvantages of equipment leasing to help you decide what’s best for your business.
What is the leasing of equipment?
Because it relieves the financial hardship of a sizable, one-time payment, equipment leasing is a desirable finance alternative. You should know all the advantages and disadvantages because business equipment leasing isn’t right for everyone and has risks just like any other type of funding.
The Pros of Leasing Equipment
1. Acquire Equipment with Lower Up-front Costs
The ability to spread out the expense of your purchase is one of the most alluring features of equipment leasing. Instead of purchasing and owning your equipment, a lease program requires that you make monthly payments to your leasing firm for the use of the equipment. Mostly, the overall cost will be less than what you would have paid to buy the equipment. In addition, you pay off the lease incrementally, typically every month. Many business owners choose equipment leases as a finance option because of the flexible payment options available, especially those who cannot afford to buy equipment upfront.
2. The Ability to Upgrade
When you lease equipment, upgrading to better versions is much simpler, especially if you’re smart about how you structure your rental agreement. Consider the scenario where you require a specific piece of medical gear for your doctor’s office but anticipate that a superior model will be available in two years. Using an outdated model will inevitably put your company at risk of becoming obsolete. Therefore, you should upgrade as soon as a newer model becomes available.
With a lease, you can turn in your old model and upgrade to the new one at the end of your lease by agreeing to a two-year lease. Also, you won’t have to worry about selling the outdated equipment because you don’t own it.
3. More Adaptability
Equipment leases are particularly helpful when you want to buy a piece of equipment but aren’t sure if you’ll use it permanently. For instance, if your services change, the equipment you need today might not be needed tomorrow. You run the danger of being stuck with equipment that you only require temporarily, whether you use conventional equipment financing with a company like Charter Capital, or buy the equipment outright.
However, with most equipment lease financing options, you’ll be free to get rid of any equipment that ends up being superfluous.
The Cons of Leasing Equipment:
1. You Do Not Own the Equipment
There are advantages to owning equipment, such as tax breaks. Yet, you might not receive those advantages if you lease equipment. Also, when you lease equipment rather than buy it, its worth is not recorded in your financial statements. Of course, this can be advantageous in some circumstances. However, it could also frighten away potential investors or other company financiers who view your lease as a problem.
2. You Must Pay Interest
Although renting equipment isn’t the same as borrowing it, you’ll probably still have to pay interest while your lease is in effect. Although the typical interest rates for equipment leases vary, you may expect to pay about a 5% annual percentage rate.
Naturally, if you buy the equipment, you won’t have to pay that interest. Nevertheless, your cash flow may be affected. You’ll also be liable for covering the cost of repairs and other maintenance. It may be less expensive to pay the interest on a lease. However, it all comes down to how financially stable your company is right now. Therefore, it is wise to weigh the expenses of a lease and a loan before deciding.
3. New Business Owners May Have Limited Access
A lease could be challenging to get if you own a brand-new company. This frequently applies even if you have a strong credit history and a history of responsible financial behavior. If you’re a startup business owner needing an equipment lease, you might need to put extra money down at the beginning or make other concessions to the lessor to close the contract.
Therefore, you might not want to seek an equipment lease because of this. If possible, you ought to postpone looking into equipment financing options until after your company has been running for a while.
Is Leasing Equipment the Best Move for Your Business?
While the terms and conditions of the lessor will affect the value of any equipment lease, your company’s financial state should be considered more than anything else. For instance, even if you have a sizable cash flow, a lease can be the best option if the equipment you buy would be outdated in a year. However, spreading the expense of that purchase may give your company considerable flexibility in the future, even if a lease is more expensive overall.
As you can see, there are too many particulars for anyone to provide a firm recommendation about whether you should lease or not. Therefore, consulting a financial advisor or mentor could assist you in reaching the most responsible conclusion. You can choose the best answer for your small business by self-evaluating and researching the benefits and drawbacks listed in this article.
Keep in mind that you have additional working capital choices that you might employ to buy equipment. Among these choices are:
- Microbusiness Loans
- Lines of Credit
- Cash Advances
- Inventory Loans
- Business Credit Cards