2/21/2012 1:03:00 PM Pros and Cons of Purchasing or Leasing
by Giorgio Cagliero SCORE Counselor
Question: I need to purchase some expensive equipment for an upcoming project that will net me a sizable profit, but the bank is unwilling to give me a loan. Can SCORE point me in a viable direction for obtaining this equipment?
Answer: For small businesses, especially young companies and entrepreneurs without much of an operating history, leasing, rather than purchasing, may be a feasible way to finance expansion. It is up to the business owner to determine which would be most advantageous. If you can’t find a local leasing company that offers the equipment you need, then research through the Web.
According to www.allbusiness.com, “… there are both advantages and disadvantages to leasing. Your line of business, financial situation, and equipment needs all play a role in deciding whether leasing is the right option for you.
Here are some of the advantages to leasing:
• Cash flow: Not having to spend a lot of money up front can help your business manage its cash flow more effectively, especially if you’re just starting out. You’ll most likely have a small down payment (or none at all), as well as a lower monthly payment than if you took out a loan to buy the equipment.
• Deductions: Lease payments can be deducted as a business expense on your tax return.
• Easier financing: If you have some strikes against you on your personal or business credit history, it’s usually easier to get better financing terms with leasing than if you were trying to buy the equipment.
• Support: Leasing agreements usually come with some sort of technical support from the leasing company. When you’re in a jam, in-person service and toll-free support numbers can be lifesavers.
• Keeping current: One of the best reasons to lease is that it means you always have access to the latest technologies. Make sure the lease contract provides for upgrades as they become available.
• Flexible terms: Leasing companies usually offer terms to fit your needs and budget. Be aware of all the risks that some of the terms could involve before you sign on the dotted line.
Here are some disadvantages to leasing equipment:
• Overall cost: Just as with leasing a car, leasing equipment is almost always more expensive in the long run. Also, keep in mind that you build no equity in the equipment.
• Early termination fees: Even if you no longer use the equipment, you’re required to make the monthly payments. If you no longer need the equipment, there will be substantial early termination fees to end the lease.
• Complicated terms: Make sure you fully understand the terms and conditions of the lease, such as required insurance on the equipment, what happens at the end of the lease, who finances the lease, and who is responsible for repairs.
www.nolo.com, a legal advice site, says, “Leasing equipment can be a good option for business owners who have limited capital or who need equipment that must be upgraded every few years, while purchasing equipment can be a better option for established businesses or for equipment that has a long usable life. Each business is unique, however, and the decision to buy or lease business equipment must be made on a case-by-case basis.”
So take heart, just because the bank won’t lend the money to purchase, do your research and find a company that will lease the equipment.
This way, you will have the equipment you need for that important project and can then make the decision after the lease expiration to extend the lease, or purchase.
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