If you’re asking yourself whether or not you should lease or buy, you’re simply not asking the right question.
The question you need to ask is what makes the most sense financially after you gather all the important information and run a calculator to it all.
First, a loan or a lease are not really that different. A capital leasing company will allow you to “Lease” anything your bank would loan you money for in this business. You can almost always get either one you choose.
Alternatively, you can “Loan” yourself the money from your savings account as well. Now purchasing outright may not feel like a loan, but you’re essentially taking a loan away from any interest you may have earned on that money or any opportunity costs have. There’s a concept in business called Other People’s Money. It will allow you to grow much faster than self financing everything. Good or bad, growth usually requires OPM.
A before you get all high and mighty about how you pay cash for everything, that’s great! For small businesses, that makes sense, but there isn’t hardly a company on the planet that does more than a few million dollars in revenue that isn’t paying interest in some form or another. It’s necessary to better leverage their cash and lower their tax burden.
These are some of the questions you need to ask (After you have decided you need to make the purchase of course):
- How much cash do you have available? How much should you keep in a rainy day fund, and what other opportunity costs are there if you spend the cash?
- What is the down payment needed? In my experience leasing usually requires less down.
- What fees are associated with taking out the loan? There are almost always documentation fees. Be sure to have these all clarified.
- What will the effective interest rate be? You may need to reverse calculate out this rate. Be sure to include any fees that sit on top of the monthly payment.
- How long are the terms? 3-5 years is very common in our business. In most cases, you should aim to pay off the loan before the equipment ends its useful lifecycle.
- Are there any early repayment penalties? I have personally found some lenders will actually waive these if you simply ask them, but write them into the contract by default.
- How is property tax handled? In my experience, a loan through our bank means we pay property tax for the equipment directly to our county assessor, but on a lease, it flows through the lender and they bill us for it (The cost is still the same).
- What will the buyout be? On most loans, your last payment is the last payment you make, but on a lease, you may have a $1 buyout, a $20% buyout, or a fair market value buyout. There are other options as well.
- Are there any incentives directly from the manufacturer? Sometimes there are nice financing incentives from the manufacturer that you need to ask about. Lower interest rates, or pushing your first payment out until next year are some examples.
- Should you/Could you wrap any additional costs into financing? You may consider financing the cost of transportation, installation, consumables, or even an extended warranty into your financing – especially if you are being offered low or 0% interest.
- What does your accountant say about all this? There are slightly different short term tax advantages for a loan vs a lease at times. In the end, you’ll deduct interest and depreciation, but how quickly you can do that might be affected by the financing.
Once you have answered these questions, and calculated out the total cost of ownership, the total hit to your cashflow, and the tax implications, you can make an informed decision on how to purchase equipment for you sign or print business.