Is it better for SMBs to buy or lease new tech equipment?

The Decision: Buy or Lease New Equipment?

October 22, 2015 Tech4BusinessNow Article

If it’s time for your SMB to invest in new IT hardware, consider the pros and cons of buying versus leasing.

By Andrea Holved

When the time comes to acquire new computer equipment, there are generally two options: buy or lease. But it can be difficult to discern which option is best for your business. Make the wrong choice and you risk needlessly overspending—or tying up your cash or credit lines when they’re needed for other expenses.

Here are some pros and cons of buying versus leasing office equipment:

The benefits of leasing

You can lease almost anything that’s business-related and expensive—copiers, vehicles, even agricultural equipment. Leasing is essentially renting: you commit to a set monthly payment for a certain period of time, usually three to five years. At the end of the lease, you can choose to renew it, return the equipment or buy the equipment at its fair market value (or a predetermined price, as stated in the lease agreement).

While you’re leasing the equipment, it’s yours to use and configure as you please. Leased equipment can slide into your network, security settings and overall business operations as seamlessly as purchased equipment.

If you damage or otherwise compromise the equipment you’ve leased, the company you’re leasing from will charge you as specified in your contract.

Here are some of the advantages of leasing:

  • State-of-the-art equipment: Leasing means that you won’t be stuck with outdated technology. “If the tech has changed by the time your lease is up, simply lease the new tech,” says Bob Hirth, a professor of management at High Point University in North Carolina. “You don’t have a long-term commitment.”
  • Tax write-offs: In the U.S., if you lease equipment, your lease payments are considered expenses. That means that, on your U.S. tax return, you can write off the full amount you pay to the leasing company that same year. That can help your business pay fewer taxes in the short-term and keep more cash on hand. But keep in mind that if the equipment qualifies for the Section 179 expense deduction, then an outright purchase may offer a bigger tax benefit.

The cons of leasing

  • You often have to negotiate the perks: A lease can come with all kinds of extras—or not. Essentials such as customer support, regular servicing, supplies like toner or paper for your copier and even the terms of who pays the property taxes for the equipment are negotiable add-ons to your lease agreement. If you’re comfortable negotiating, this may be a “pro,” but if you’re not, check out our story on negotiation strategies for tech.
  • It can be difficult to return the equipment: When a company structures a lease agreement for a brand-new piece of equipment, the total payments they’re scheduled to receive won’t cover the full cost of the equipment. Typically, they’re left with a residual value on their books of 5% to 20% of the equipment’s original price, says Mike Milburn, VP of sales at JD Young, an Oklahoma-based technology services company with an in-house leasing division. And some leasing companies—especially those that offer such low rates they’re left with 20% residuals—will put a lot of effort into trying to recoup that residual rather than make it easy for you to return the equipment at the end of your lease, Milburn says. Whether they charge shipping for the return, claim damages or apply high-pressure sales tactics to persuade you to extend your lease, it may not be as easy as you’d hoped to get rid of old equipment.

The pros of buying

  • If you’re going to hold onto the equipment, buying is cheaper: Depending on the fees and rates associated with the lease, a company leasing a piece of equipment for several years will typically end up paying between 8% and 15% more than if they’d bought the equipment outright, Hirth says. If the equipment is something that isn’t likely to be outdated soon and that your business will use for years, it may be best to purchase it.
  • In the U.S., some purchases will qualify for the Section 179 tax deduction, which in some cases allows you to deduct the full cost of the item in the first year of purchase.

The cons of buying

  • Eats up capital and credit lines: Whatever you paid for your new equipment—whether you used cash or credit—is capital or access to capital that is no longer available to your business in case of an emergency. If your company is relatively young, or if you have uncertain times ahead, it may be best to keep your cash and credit lines free.
  • It’s not easy to switch to new tech: If you own a piece of equipment that’s been rendered obsolete by new technology—or where the performance degrades over time—it’s unlikely that you’ll find a buyer on the used market. If you need the new tech, you’ll have to eat the cost of your old equipment and pay for the new equipment, which makes it a lot more difficult to upgrade.

Read more about leasing on the Small Business Administration’s website: https://www.sba.gov/content/leasing-business-equipment

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