Can Leasing Equipment Quiet Your Working Capital Nightmares?

As an aspiring farmer, my thoughts have been occupied by the looming specter of capital-intensive equipment purchases. I have nightmares of tractor parts gobbling up my savings account and a market truck burning dollar bills in its greedy engine.

If you’re looking to open a restaurant, a tech business, or any other equipment-heavy enterprise, you probably know how I feel. But is there a way to circumvent the huge outlay of capital required by equipment purchases? For some, leasing may be the antidote to our voracious nightmares.

Pros of Leasing

1. It frees up working capital. This is probably the biggest incentive to lease instead of buy. As we’ve already established, buying equipment often requires spending a whole bunch of money at once. Leasing equipment shifts the purchase into your ongoing operating costs. You pay a monthly fee, just like your rent or utilities.
2. It usually doesn’t require bank financing. To get the money needed to purchase a tractor or a giant oven, small businesses often seek bank loans. Leasing won’t require the same outside financing and is often the only option for businesses with less-than-stellar credit.
3. It offers some tax perks. Come tax time, you may be eligible to deduct lease payments. According to the Business Owner’s Toolkit: “If you lease your equipment instead of purchasing it, you can't depreciate the equipment. However, you will generally be able to deduct the lease payments you make, at the time that you make them, which can result in a larger tax benefit than you'd get if you bought the equipment outright.
   Good Candidates for Leasing: Technology that quickly becomes outdated, equipment with a short life span (i.e. ice machines), equipment you only need for a short period of time, or equipment that will have a poor market value at the end of its use.
   

Cons of Leasing

1. It’s not yours: You’ve just spent a whole bunch of money over the course of three years, and yet it’s not yours to keep. It’s not your asset, it’s not your anything.
2. You’ll probably end up paying more. In general, you’re going to spend more money paying for to lease an item over time than to purchase it outright.
3. Some lease terms are shady. The Small Business Administration warns: “However, while favorable leases are often good bets, unfavorable ones can easily sink an emerging venture. While doing your legal homework can help prevent bad deals, it's always a good idea to have a lawyer look over a lease before signing it.”
4. You may not have much wiggle room once the lease is signed. So, what happens if you sign a long-term lease, but your shiny new thing-a-ma-bob isn’t as useful as you thoughts? You’re stuck making payments for the duration of the contract.

How do you decide?!
The best way to decide whether to lease or to buy is to perform a cash flow analysis. Check out this case study to see how it’s done or use one of the many handy calculators. Before completing this exercise, you’ll have to do quite a bit of research regarding the life and value of the equipment in question.

Other Resources
“Should you Lease or Buy your Tech Equipment?” by Peter Alexander
“Business Equipment: Buying vs. Leasing”