Leasing vs. Buying Office Equipment
Every office and business enterprise requires office equipment to ensure smooth running of the business. Investing in office equipment for all types of businesses, regardless of whether they are startups or well established, is necessary. But there is a catch; small business owners usually do not have sufficient financial means to purchase expensive office equipment.
In such cases, leasing office equipment makes things easier for the business owner to run the business without falling into a financial hole right from the start. As for medium-scale businesses, sometimes purchasing the equipment outright does not seem to be a viable option due to many underlying problems, so leasing office equipment for a fixed term makes sense.
When you consider getting new office equipment, there are different factors to consider apart from the overall cost such as flexibility, tax deductions, maintenance, etc.
In this article, we will discuss in detail everything related to buying and leasing office equipment and how it can help small- and medium-scale businesses function efficiently. In particular, we will cover sections: 1) financing options for your office equipment, 2) type of equipment finance providers, 3) advantages and disadvantages of leasing office equipment, 4) advantages and disadvantages of buying office equipment, and 5) if you choose the leasing option for your company.
FINANCING OPTIONS FOR YOUR OFFICE EQUIPMENT
Buying office equipment seems to be the easiest way to go when it comes to getting new office equipment because the newly purchased equipment is your property and you can make alterations whenever needed. You will not have to worry about signing contracts and agreements. Maintenance is also completely under your control so you can get it done anytime.
You can pick a brand and model of the equipment as per your needs. You are not bound by any obligation, so when the equipment no longer fulfills the purpose you purchased it for, you can easily sell it and get a new one instead.
Buying office equipment is best when the equipment you need is inexpensive, fits your budget, and has a long life, like a desktop computer for instance. Did you know tax incentives under Section 179 of the IRS Tax Codes are higher for purchased office equipment than leased?
Also, if your equipment does not qualify under Section 179, you can still leverage a depreciation deduction for the equipment purchased for your office. However, buying office equipment seems out of the question for more expensive items for many reasons. For business owners who have limited means, handling the high initial costs of buying office equipment can be a problem.
In certain industries where technology-driven equipment is needed from time to time, buying it is not a good option because once the technology becomes outdated you are stuck with it since you own it. The maintenance work is also the owner’s responsibility, which means that you will have to pay to get repair work done due to wear and tear of the equipment.
Sometimes the maintenance expenditure is so exorbitant that buying office equipment becomes more of a bane than a boon.
On the other hand, leasing has become a popular method for acquiring business office equipment. If you need tech-savvy equipment for running your business every 3-5 years or so, leasing is the best option because it allows you to upgrade to new technologically advanced equipment.
Simply put, leasing is like a loan in which the lender buys and owns equipment and in turn, rents it out to a business at a flat monthly fee for a limited term. Once the lease comes to a close, you can buy the equipment at fair market value, lease new equipment or simply continue leasing the existing one.
When it comes to equipment leasing, there are two kinds of leases – operational and financial.
2.1 Operational Lease
The operational lease is one in which the lessor allows the company to use an asset for a particular period of time. In such an arrangement, there is no transfer of ownership. The lease period of an operational lease is usually less than the economic life of the equipment. Once the lease ends, the lessor sells off the equipment to recoup additional costs.
In contrast to an outright purchase or securing equipment through a standard loan, you cannot list any leased assets as capital. It is considered rental expense, which provides two great financial advantages:
- Your leased equipment will qualify for tax incentives;
- The equipment will not be recorded as a liability or asset.
Usually, the rates offered by deals are a little over the top but ideally the average APR for an operating lease is 5% or lower. The lease terms normally range from 12-36 months. Since equipment leasing has now become the norm, new accounting regulations from FASB require all firms to reveal their lease obligations so that a false impression of financial strength is not created. In fact, nowadays all companies must include all leases except ones with the shortest terms on the balance sheets. Here is the catch though; leased equipment may not be included as an asset but there are still some legal obligations to be fulfilled.
2.2 Financial Lease
Another equipment lease, also known as a capital lease, is a financial lease. The structure of this leasing arrangement is quite similar to that of an operational lease but it differs in terms of ownership. In a financial lease, the equipment purchased is owned by the lessor. As far as the balance sheet is concerned, the lease itself is reported as an asset, which in turn increases the firm’s holdings and liability.
More often than not, a financial lease is preferred by large enterprises and major retailers for it offers an amazing tactical advantage. The company can enjoy depreciation tax credit on the equipment as well as the interest expense of the lease itself. Also, the company may purchase the equipment once the lease term is over if needed.
Even though the advantages of choosing a financial lease are greater, the APR for a financial lease is almost double to that of an operating lease, which is why it becomes a difficult choice for small and medium business owners with limited financial means. For a financial lease, standard interest rates are currently ranging from 6-9%, while the lease terms available range from 24-72 months.
TYPES OF EQUIPMENT FINANCE PROVIDERS
Many leasing companies have now sprung up that form the subsidiary leasing arm of dealers and manufacturers. Such companies are often termed ‘captive lessors’ because their primary aim is to facilitate leases with its network of dealers or parent company.
All third party lease providers come under this category such as banks, diversified financial companies and lease specialists that can provide leases to a business directly. An independent lessor is different from a leasing company because it typically specializes in remarketing the equipment to multiple manufacturers by offering a more competitive APR.
Just like insurance brokers, lease brokers also serve as an intermediary between the lessees and prospective lessors by presenting offers, submitting requests for financing and handling all the legal formalities as well as the paperwork. However, hiring a lease broker is more of a luxury because you need to pay a steep commission fee. When you negotiate a deal, you can expect to pay 2-4% of the cost of the equipment.
Availing the services of a broker can be helpful in certain industries, such as when you need to obtain a wider range of equipment at a better rate than you normally would otherwise.
ADVANTAGES & DISADVANTAGES OF LEASING OFFICE EQUIPMENT
Adapt To New Technology Quicker
In certain industries, adapting to technology can help you stay on top of the game. This is where leasing helps you do just that because you can lease office equipment for a specific term period. This means that you do not have to be stuck with the equipment once the technology becomes obsolete.
When the lease term ends, you will have an option to upgrade office equipment, continue the lease, or simply buy the equipment at a fair market value. Getting rid of outdated equipment and adapting to the latest technology quicker gives you a competitive advantage.
Less Expense Up Front
Saving cash is critical for business owners running small- and medium-scale businesses. Do not let scarce resources limit you from taking your business to the zenith of success. You can explore more avenues and get hold of more expensive equipment by leasing it instead of purchasing it.
Purchasing office equipment is out of the question for many entrepreneurs simply because the upfront costs are too steep, but when you lease equipment you do not have to worry about making any down payments. That is not all, leasing also gives you more buying power. For instance, you would be able to purchase equipment worth $1500 but with leasing as an option, you would be able to get hold of more expensive equipment, worth $3000 or more, with periodic payments.
Leasing will also help you qualify for tax deductions by providing income tax benefits. When you lease office equipment, it is not considered an asset, which automatically saves you from depreciating the capital cost of equipment. Instead, all leased office equipment is classified as lease expense.
Another great advantage of equipment leasing is flexibility. When you make an outright purchase, you are expected to pay sales tax. However, when you opt for equipment leasing the tax payments are spread over the entire term of the lease.
Sometimes when the equipment undergoes a lot of wear and tear, the maintenance costs are too high and take a heavy toll on the business expenditure. With equipment leasing, this problem is solved because you do not have to worry about maintenance at all. All you have to do is make flat payments for the lease term while all maintenance work is handled by the leasing company.
Leasing Becomes Costly Over Time
Yes, equipment leasing may enable you to acquire office equipment while avoiding a lump sum payment, but if you do some calculations, you will see that leasing is more expensive than outright purchasing. The reason why equipment leasing becomes costly over time is that you pay the cost of the equipment along with the company charges.
Once the lease term ends, you are expected to pay a fixed amount monthly to continue using the equipment. Therefore, you will be paying almost double the amount over the years for office equipment without ever owning it.
The big bummer for most entrepreneurs is that you never become the owner of the product with leasing. The equipment will remain the property of the leasing company throughout – before and after the lease is over. Also, you cannot sell the equipment even after it no longer serves your purpose because the ownership is never transferred to your name.
In the event that you need a better model or simply wish to discontinue using the equipment, you are required to cancel the contract and pay a hefty penalty.
Long Lease Terms
Another major downside to equipment leasing is the long lease term attached to it; meaning you are committed to making monthly payments even if you stop using the equipment. This often puts entrepreneurs in a fix because they have to pay a large penalty for early termination.
Disagreement over Maintenance
Maintenance is another problem that needs to be tackled once you are bound by the lease. Leasing companies do provide maintenance coverage, but the cost is then added to your monthly bill.
Limited Product Availability
With equipment leasing, your options are limited. If you were to buy office equipment, you could purchase any make and model considering the needs of your business, but this is not the case with equipment leasing. You can only select from a limited range of products offered by the leasing company.
ADVANTAGES & DISADVANTAGES OF BUYING OFFICE EQUIPMENT
Ownership is one of the greatest advantages of buying office equipment on your own. Since the equipment is entirely owned by you, you can make modifications or sell it off as and when needed without getting involved in legal obligations. The maintenance is also handled by the owner.
Selling the Equipment
Once you become the owner of the office equipment, you can sell the equipment at any time without delving into any formalities and agreements. Also, the equipment can be modified and/or repaired as per the requirements of the owner.
The tax incentives under Section 179 of the IRS Tax Code are more for buying office equipment than leasing it. If the equipment that you have purchased cannot be classified under Section 179, you can still claim a depreciation deduction for it.
No Need to Deal with Agreements/Contracts
With leasing, you have to abide by all the terms and conditions laid down in the lease agreement and contract, but that is not the case when you purchase office equipment outright. You can directly purchase the equipment with no need to fulfill any additional obligations.
You can exercise complete control of the office equipment that you buy. When you lease office equipment, you are only allowed to exercise a limited degree of control on it since the equipment is still owned by the leasing company.
High Initial Costs
When you purchase office equipment, high initial costs are almost inevitable because you have to pay all costs up front. This usually becomes a major concern for entrepreneurs who do not have abundant financial resources, which is why they inevitably have to resort to leasing.
Stuck with the Same Technology for Longer
In certain technology-driven industries where the latest state-of-the-art equipment is needed, buying office equipment seems to be a bad choice. This is because you will have to sell it in order to purchase new equipment, or continue to use it until you can afford to buy a new one.
Maintenance can be a problem for most entrepreneurs because it can be very costly over time, due to the wear and tear of the machines. However, when you lease office equipment, maintenance is done by the leasing company most of the time, if the maintenance coverage is provided.
IF YOU CHOOSE THE LEASING OPTION FOR YOUR COMPANY
1) Leasing Process
When you choose the leasing option, here is how you begin. First, you need to identify your equipment needs for your business. You can lease practically any type of equipment for your office on two conditions:
- Leasing is usually an option when you want to buy expensive equipment or small equipment in bulk. Therefore, it is hard to get a lease for equipment valued at less than $3000. Usually, leasing is a viable option for those who are looking to buy products worth $25,000 or more.
- Also, the equipment you want to lease must be considered a hard asset. Hard assets are those that can be classified as personal property with no permanent attachment to real estate.
2) Consider Before Leasing
Operational Lease vs. Financial Lease
- An operational lease allows you to use the equipment for a short period of time with no transfer of ownership to the user’s name.
- With a financial lease, the user owns the equipment and it is reported as an asset. Therefore, it increases the company’s holdings and liability, too.
Monthly Budget Consideration
For those who are on a tight monthly budget, it is important to understand that securing a financial lease is more expensive than an operational lease. You can get an average APR of 5% on an operational lease and 9-10% on a capital lease.
How Long the Equipment Will Be Used
The contract for an operating lease usually ranges from 12-36 months, so you can lease office equipment for the short term. Conversely, a capital lease contract extends for longer periods of time, usually up to 24-72 months.
How Long the Technology Will Last
If you are operating in an industry where technologically advanced equipment is necessary for running a business smoothly, then it is best to opt for an operational lease so you can upgrade the equipment every three years or so. While on the other hand, if technology is not an issue, then you can go for a finance lease that lasts longer.
3) Compare Conditions from Several Lessors
Purchase Price of Equipment
Equipment leasing is usually done when your equipment needs upgrading from time to time like electronic devices, computers, etc. You can secure a lease if you have to buy pricey equipment or buy products in bulk. The purchase price of the equipment should not be less than $25,000.
Possibility of a Buyout Option
With a capital lease, you have the option to buy the equipment at market value once the lease term is over. Look for a buyout option if you wish to consider purchasing the equipment later on.
Early Termination of the Lease
Termination of the lease is also something you might want to consider. If you terminate it early, you will be required to pay a large penalty.
4) Ask Questions before Signing the Lease Agreement
How Much Money Is Required Up Front?
When you opt for a lease, the lessee usually claims depreciation in exchange for a lower APR. Therefore, if you do not want to let go of the depreciation credit but you still want to go ahead with equipment leasing, make sure you ask about everything related to capital leases and the availability of financing.
Are the Financing Terms Flexible?
Leasing is often considered to be the most flexible option, if not the most cost effective one. If financing is a bit of a problem, you can opt for a step-up lease in which you can start off making low payments and increase the amount gradually as the lease term ends.
Who Will Benefit From the Tax Incentive?
Before you sign the lease contract, make sure you ask about whether you or the leasing company will take advantage of the tax incentive.
5) Decide Which Lessor to Choose & Start Using Your Newly Leased Equipment
At the end of the day, you will have to decide which lessor to choose depending on the kind of equipment you want to lease, your budget and for how long you want to use the leased equipment. If you need to lease small office equipment in bulk for a shorter term, go for an operational lease. If you need to lease heavy machinery and want to classify it as capital, go for a capital lease instead.
Now that we have discussed everything related to buying vs. leasing office equipment, we hope you will now be able to weigh the pros and cons and select an option that is in your best interest.
Welcome to the 22nd episode of our podcast with John Lee Dumas from EOFire! You can download the …