Leasing vs Purchasing Business Equipment: Which is Right for You?

“Should I lease the equipment my business needs or purchase it?” This is a question that many business owners grapple with at some point. Like all business decisions, there are trade-offs to consider, each with its own set of consequences.

At the end of the day, every business owner, CFO, or executive is ultimately trying to maximize profit. Understanding the pros and cons of leasing versus purchasing business equipment is crucial for your next acquisition.

Let’s explore the pathways of leasing and purchasing business equipment to determine what makes the most sense for your business.

Understanding Equipment Purchases

Starting with the traditional equipment purchase, this approach is what many are accustomed to. You find the equipment you want for your business and either finance it or pay cash. The equipment becomes an asset on your balance sheet, and its depreciation is expensed monthly. Once you finish paying it off, you can either keep the equipment for continued use or sell it. This process is straightforward.

Purchasing Pros

1. Lower Overall Cost

   Typically, the total cost of purchasing equipment is less than leasing. This is before considering potential tax savings from true leases.

   
   

2. Greater Control

   Purchasing gives you more control over the equipment. You can sell it whenever you choose or use it for as long as it remains beneficial.

   
   

3. IRS Section 179 Deduction

   The IRS allows you to write off the entire purchase amount, up to a certain limit, in the year the equipment is bought. This can be advantageous if you need a large write-off to offset income and reduce tax liability.

   
   

Purchasing Cons

1. Depreciation and Obsolescence

   You may find yourself stuck with equipment that depreciates in value and becomes obsolete. Businesses need to maintain a competitive edge, and purchasing may deter quick replacements when newer models are available.

   
   

2. High Initial Costs

   Purchasing often requires significant upfront cash or a high down payment if financed. This can strain your cash flow.

   
   

3. Potentially Missed Tax Savings

   While you can write off the purchase cost in the first year, leasing may offer even greater tax benefits that you might overlook by choosing to purchase.

   
   

The Case for Leasing Equipment

Leasing may be a foreign concept for some business owners. However, according to Entrepreneur.com, the Equipment Leasing Association estimates that 8 out of 10 U.S. businesses lease some or all of their equipment. So, why do so many businesses choose to lease?

Leasing Pros

1. Minimal Upfront Costs

   Leasing allows you to acquire equipment with little money upfront. Many leases require only the first and last payments, unlike purchases that often demand a hefty down payment.

   
   

2. Easier Equipment Upgrades

   Whether you’re in healthcare, construction, or transportation, having state-of-the-art equipment is crucial. Leasing provides a cost-effective way to regularly update your equipment without significantly impacting your cash reserves.

   
   

3. Significant Tax Savings

   Many businesses, including Fortune 500 companies, lease equipment primarily for tax benefits. With “true” leases, you can write off the entire lease payment as a business expense. Always consult your tax accountant before signing a lease to understand the potential tax implications.

   
   

   Example of Tax Savings:

4. A contractor leases a tractor for $75,000.

5. Monthly lease payment: $1,750 for 60 months.

6. Total expenditure: $105,000.

8. This could reduce taxable income by $105,000, potentially saving $34,650 in taxes if in a 33% tax bracket.




9. Improved Debt Ratios

   Leasing helps maintain favorable debt-to-revenue ratios. Since leases typically do not appear as debt on your balance sheet, they can help keep your borrowing capacity intact for future needs.

   
   

Leasing Cons

1. Higher Overall Costs

   If you plan to keep the equipment long-term, leasing may end up costing more than purchasing.

   
   

2. Limited Control

   With a lease, you usually cannot sell the equipment at will. Lease agreements often include clauses requiring you to maintain and service the equipment to certain standards.

   
   

Making the Right Choice

Whether you choose to lease or purchase your next piece of equipment, it’s essential to weigh the trade-offs. Each option has its benefits and drawbacks, and understanding these can help maximize your business's bottom line.

About WillowArk Funding

Our team at WillowArk Funding has been specializing in Medical & Manufacturing equipment financing for over twenty years.

Your satisfaction is our top priority. We aim to earn your business and become your long-term financial partner. We help you grow your business and achieve your goals. Our expertise will guide you in making strategic and informed decisions.

When you work with us, you’ll enjoy great rates and flexible monthly payments. Let us simplify your job and boost your profits. Get Started Today or call us at (949) 606–2194.