Costs of equipment leasing

Equipment leasing has lower up-front costs because you typically don't need a down payment. Avoiding putting down a large down payment can help cash flow issues in your business because it frees up that money to be used elsewhere. However, keep in mind that you'll usually pay interest on a lease. On the plus side, lease payments are predictable since they are due each month, so you can easily add them into your business's budget. 

Costs of buying equipment

On the other hand, buying a piece of equipment comes with the larger up-front cost of a down payment, but a lower overall price because your payments will eventually stop — unlike with leasing. If you can buy with cash, you avoid the interest that usually comes with a lease. Furthermore, when you buy, you can then sell the equipment at the end of its usefulness and recoup some of the equity you have put into it. 

If you can't afford to buy the equipment outright, equipment financing, either through an equipment term loan or an equipment line of credit, could be a great choice. Ask yourself whether the equipment you're purchasing with an equipment loan will bring in enough additional revenue to cover the monthly payment. In other words, will the equipment pay for itself? For example, buying everyone in your company laptops with the latest technology may increase productivity enough to cover the cost of the laptops, or it might not. If it isn’t going to increase productivity enough to cover the cost, then it may not be the right purchase to make. 

Another example is tooling to expand a production line. If you're currently up against production capacity and need to satisfy demand, then a new machine or tool makes sense, but what if demand stalls? Have you analyzed the likely level of demand to make sure the new machine will be used to capacity?  

If the equipment you're buying won't cover itself, it may not be necessary. On the other hand, if the equipment your buying will allow you to access new revenue streams, cut costs, or increase production to a level that pays for itself quickly, this is a good option.

Other costs to think about

There are several other costs to consider when deciding between leasing and buying equipment, like storage and transportation expenses. This is especially true if you're buying heavy machinery. Make sure you can afford to move the equipment from the worksite to the storage area and that you can stash it somewhere it won't get damaged.

Use our calculator

Dealing with a lot of different numbers can be overwhelming, so head over to our buying vs. leasing equipment calculator to get a hand with the math. This calculator can determine which of the two — leasing or buying — makes the most sense for your business. You'll simply insert things like the purchase price, the amount of your down payment and the sales tax rate, along with information for the potential purchase and lease. The calculator will do the math for you to help you figure out which option makes the most financial sense for your company. 

Capital lease vs. operating lease

A capital lease works similarly to a standard loan by transferring owners' rights to you and it lasts for up to five years. It's considered debt, so the equipment shows up as an asset on the company's balance sheet. You'll also have the option to buy the equipment outright at the end, but keep in mind that it will eventually become outdated. 

Meanwhile, an operating lease is more like renting equipment. The leasing company acts as the owner. It also comes with a shorter term — up to three years — so it's a popular small business choice.

Is there a buyout option?

Your lease may come with an option for purchasing the equipment at the end of the term, which is called a buyout option. The two kinds of buyout options are fair-market value (FMV) and a $1 buyout option. The FMV option allows you to purchase equipment for the determined fair-market value at the end of the lease. On the other hand, the $1 buyout option allows you to buy the equipment for $1 at the end of the lease. The catch with the $1 option is that it usually costs more throughout the lease than the FMV option, so you may not be saving money in the end.

The period of time you'll need the equipment can be a big factor in choosing whether to lease or to buy. If you'll only be able to use the technology for one or two years before needing to update, you'll probably want to go with a lease. Leasing gives you access to new equipment more frequently. For example, if your company relies on the latest computer technology to fulfill its services, leasing computers for your staff might be the right move. However, you have to pay for the lease for its entire term, so if you would have to sign a three-year lease but only use the equipment for two, you're wasting money. 

On the other hand, if you plan to use the equipment for 10 to 12 years without having to invest in major upgrades, buying equipment might be a better choice for your company. Buying means you own it and won't have to comply with update requirements from a leasing company. Furthermore, you can always sell the equipment if needed and recover some of the expense of the purchase.

Plus, the type of equipment you want matters. Equipment leasing is usually only offered on new equipment; you'll probably have to buy if you want used equipment.

You'll also want to consider how easily you need to be able to add more equipment to your company. Again, buying more equipment is straightforward. Some leases allow you to add equipment — you just have to renegotiate the terms. 

Also, you can make upgrades to your equipment easily if you own it or decide how to manage maintenance on your own. With a lease, the leasing company may require you to perform expensive maintenance updates, or you may have to wait for them to fix issues that need immediate attention, resulting in downtime. However, if you don't have the manpower or capacity to repair or maintain the equipment, it can be a huge plus for the leasing company to handle these problems. 

Finally, a leasing company may have fewer makes or models to choose from or may not have the brand you want. Buying can open up more choices since every product is available and depends only on what you can afford.