Should I Lease Or Buy Equipment?

by Todd Smith

The answer to this question depends on many factors. Companies often don’t have enough capital to purchase equipment outright, and even if they do, it doesn’t always make financial sense to do so. While some companies choose to pay cash for their equipment, this option ties up capital and could lead to cash flow issues. There are pros and cons to both options:

The Pros of Buying Equipment:
• Equipment depreciates, which could lower tax liabilities.
• Business owners are free to use the equipment however they choose.
• For business owners with good credit, the equipment funded with the loan could serve as collateral.

The Cons of Buying Equipment:
• For loans used to purchase equipment,lenders may require down payments.
• Loans increase the liabilities on the balance sheet, which could impact the business borrowing more money in the future.
• Lenders may require collateral beyond the equipment being purchased for the loan.
• For outright purchases, a large sum of cash is needed to purchase equipment, which depletes capital reserves.
• Equipment often becomes obsolete, causing the equipment’s resale value to decrease.
• Business owners are responsible for the overall costs and repairs.

The Pros of Leasing Equipment:
• Down payments are usually smaller (or none) for leasing vs. financing.
• At the end of the lease agreement, the business owner can extend the lease, buy it, or return it.
• In many equipment lease agreements, the leasing company is responsible for repairs.
• It may be easier for business owners with minimal credit to obtain the equipment they need.

The Cons of Leasing Equipment:
• Leasing is often more expensive than purchasing equipment with cash.
• Depending on how the lease is structured, business owners may not realize any depreciation for the equipment.
• It’s possible for the lease payments to outlive the usefulness of the equipment. The business owner must continue to pay or to break the lease, which is costly.
• Under new rules of accounting, operating leases may appear on the balance sheet as a liability.

Answers provided by Todd Smith, Senior Vice President, Commercial Group Lending Manager at Simmons Bank. He can be reached at 314.569.7242 or
todd.smith@simmonsbank.com. The views in this article are those of Todd Smith
individually and do not reflect those of Simmons Bank.