How to decide between renting or buying equipment for your business?
If your business needs equipment for a short period of time, to increase capacity during a busy period or because that one project needs specialty equipment, then renting the equipment is your best option. Renting gives you the flexibility to chose specific items for just the amount of time you need it.
If you’re going to use equipment for a long period of time and on several projects in a row, however, you’ll probably want to either lease or buy the equipment. In this article, we’ll be discussing the advantages and disadvantages of leasing and purchasing equipment to help you make better buying versus leasing decisions.
Even if you need to take on a loan to invest in new equipment, it might be worth it.
Advantages of buying equipment
Buying your own equipment is definitely appealing in terms of total costs, tax benefits and the fact that once you’ve paid for it, the equipment is yours.
Lower overall cost. If you’re looking to spend less on equipment in the long run, buying it is definitely your best option.
Tax benefits. Depending on the equipment you purchase and the country you are operating from, there are some tax incentives for buying equipment. For the US, tax benefits for equipment purchase are outlined in the 179 section of the tax code.
Depreciation deduction. For fixed assets – meaning assets that help your business earn income – you’ll be able to recover the cost of buying through depreciation deduction.
Ownership. Next to the financial and tax advantages, the biggest advantage of buying equipment is definitely the fact that you own it. No need to turn the equipment back in after having paid for months – even if you’ve taken out a loan to finance it – the equipment is yours to keep.
More choice. If your buying your own equipment, you’ll be able to decide exactly which brand and model you get. No need to adapt to whatever leasing company has available.
Disadvantages of buying equipment
The large initial costs will, however, have a significant impact on your cash flow. That’s why buying equipment isn’t the best option for every business.
You’ll also have to take into account the additional costs for maintenance, repairs and replacement of obsolete or broken assets.
Large initial costs. Buying equipment means you will need to pay the total amount upfront, which could affect your cash flow. If you’re taking out a loan to buy your equipment, you’ll be required to make a down payment in most cases.
Equipment might become obsolete. Buying equipment gives you less flexibility than leasing it: you’ll want to make your investment worthwhile by using your equipment as long as you possibly can, at the risk of getting stuck with old equipment. This is especially true if you’re using technology: upgrading software won’t always be an option, so you might need to reinvest in newer, more modern items.
Maintenance costs. Needless to say, if the equipment is yours, maintenance and repair costs are on you. You can make a rough estimate of what it will cost to do regular, planned maintenance to your equipment but unexpected repairs or even replacements can get surprisingly expensive.
So, what’s it going to be: buying or renting?
Deciding whether to lease or buy business equipment is a matter of weighing the pros and cons. Determine which option is most cost-effective for each asset you’re considering by calculating its net cost, taking into account the tax benefits and the resale value.
If you’re thinking about buying your equipment, don’t forget it might become obsolete, especially if it involves state-of-the-art technology or software. If you’re leaning towards leasing, make sure you’ll actually need each piece of equipment for the entire leasing period – or at least a large part of it.
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