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The cost of obtaining the business equipment required to run your company’s day-to-day operations can represent a significant expense in a small business budget. Any business owner outfitting their new business will have a decision to manage the considerable cost of acquiring business equipment.
Do you bite the bullet and purchase all of the equipment you need upfront? Or, do you spread the expense out over a more extended period of time by leasing the business equipment your company requires?
There are distinct advantages and disadvantages to both buying and leasing business equipment. However, at the end of the day, the choice of whether to buy or lease the business equipment for your company will depend on the specific practical and financial needs of your individual business.
So, let’s dive deeper into the pros and cons of each option to help you choose the right solution for your business.
Buying Business Equipment
When you choose to purchase business equipment upfront, you pay for the expense all at once, and from then on, you own the equipment and do not need to concern yourself with monthly payments. This can be a significant advantage if your business has down months where income is sparse, you will have the peace of mind that comes from knowing that your business equipment is already paid for. In addition, you will not need to concern yourself with how to make the monthly payments when business is slow.
That being said, the upfront cost of purchasing business equipment for an entire office can be pretty steep, and that may not be in the financial cards for most fledgling businesses. Let’s look at each of the specific pros and cons of buying business equipment for your company in greater detail.
Advantages Of Buying Business Equipment
There are several significant advantages to owning business equipment outright. This section will explore the benefits of ownership in greater detail.
Ownership Security
Buying business equipment outright gives you the security that comes with full ownership. In addition, having full ownership of your company’s business equipment allows you to list the kit as a business asset, increasing the overall value of your business.
Resale Value
Ownership also allows you to liquidate business equipment when it is no longer needed. For example, suppose the business equipment that you possess has an exceptionally long helpful lifespan and is not subject to obsolescence. In that case, the resale value of the used business equipment may remain strong for many years to come.
Tax Deductions
The Internal Revenue Service generally allows business owners to claim a deduction for the cost of business equipment purchased within the first year of ownership. In addition, section 179 of the IRS tax code allows business owners to deduct 100% of the purchase price of qualifying business equipment purchased and put into use during the current tax year. Essentially, this means that by buying or financing your business equipment, you will be able to deduct the entire purchase price from your reported gross income in the tax year that the equipment purchase was made.
In addition to the one-time, first-year purchase price deduction, business owners may also claim a deduction in subsequent tax years for their owned business equipment depreciation. For example, business owners are typically able to claim a depreciation deduction for owned business equipment for five years following the initial year of ownership.
Disadvantages Of Buying Business Equipment
Of course, buying business equipment outright comes with its own unique disadvantages as well. This section will delve deeper into the downside of purchasing business equipment.
Budget Busting Up-Front Cost
Arguably, the most significant disadvantage of purchasing business equipment outright is the high initial cost. Many fledgling businesses struggle to earn a profit during their first year of operation, and they cannot afford the additional cost of purchasing expensive business equipment during these early stages of business ownership.
While financing business equipment is undoubtedly an option, most financing providers, or banks, will require that the business owner or loan applicant have impeccable credit and provide a substantial down payment for loan approval. Business owners considering financing business equipment will need to carefully consider any other significant ticket business expenses such as real estate, vehicles, production equipment, materials, or inventory that will require financing to obtain as their initial lines of credit will be limited. Financing business equipment will reduce the amount of funding they may be able to get for other business purchases.
Depreciation
Like most items, the value of business equipment depreciates over time. Used equipment is worth far less than brand new equipment simply by virtue of having been used. Depending on the type of business equipment purchased, the depreciation in value can be steep, meaning that the business owner may be unlikely to recoup much, or any, of the initial purchase price of the business equipment, should they decide to liquidate the equipment at a later date.
Obsolescence
Technology is constantly evolving to perform a more significant number of functions, operate in a more efficient manner, or comply with the latest cyber security protocols in the face of new cyber threats. The constantly changing nature of technological advancement makes high-tech business equipment prone to obsolescence. Business equipment frequently needs to function as part of a complex network of interconnected technology. Suppose your business equipment becomes obsolete and is no longer able to connect and work as part of a network of more advanced technology. In that case, the business equipment will become outdated and will need to be replaced.
The risks of obsolescence apply to the accessories and materials used by high-tech business equipment as well. As business equipment models are phased out and replaced with newer models over time, it can become more difficult or impossible to obtain the ink cartridges, software packages, or other specialized accessories and materials needed to use the equipment.
Wear & Tear
Every piece of equipment is subject to the wear and tear that comes from repeated use. Business equipment is no exception. As the equipment is used over and over, day in and day out, parts begin to wear out and may eventually break down or malfunction. As the equipment ages, the business owner could face increasing expenses to maintain and repair the equipment in order to keep it functioning correctly.
Buying Business Equipment: Pros & Cons At A Glance
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Leasing Business Equipment
Choosing to lease your company’s business equipment rather than purchasing it outright can help your business gain immediate access to the business equipment needed to operate and grow your business without having to scramble to come up with the initial purchase price of the equipment before your company has had a chance to start producing a profit.
On the flip side, the privilege of leasing equipment does come with an increased cost in the long run. For example, business owners will generally pay more overtime for leased equipment when compared to the cost of purchasing the exact same piece of equipment outright.
Advantages Of Leasing Business Equipment
Leasing business equipment has some crucial advantages for business owners who are just starting out or for whom capital conservation is a concern. In the following section, we will look a little closer at the benefits of leasing business equipment.
Ability To Pay Over Time
Leasing business equipment, rather than purchasing it outright, allows the business owner to gain immediate access to the business equipment they need to operate and grow their business while breaking the cost of the equipment down into manageable monthly payments. In addition, by deferring the initial expense, the business owner is able to reserve capital, or credit, for other significant ticket business expenses such as real estate, labor costs, materials, inventory, or vehicles.
Flexible Terms
The overall requirements and terms for leasing business equipment generally offer a much greater degree of flexibility than the requirements and terms for obtaining financing to purchase business equipment. For example, the credit rating requirements are usually lower for lease applicants as opposed to the credit rating required to get a loan. Additionally, the monthly lease payments tend to be lower than the payments required to pay back a loan.
Upgrade Option
Leasing business equipment protects against the risks of obsolescence. This is particularly advantageous when leasing high-tech business equipment, which is more likely to become outdated quickly. Rather than being stuck with obsolete equipment, the leased equipment can be returned at the end of the lease, and the business owner can begin a new lease of the latest upgraded equipment.
Tax Deductions
Business owners may be able to claim a portion, or all, of the cost of their monthly lease payments as a business expense deduction on their annual tax return, helping to reduce their overall tax burden.
Disadvantages Of Leasing Business Equipment
Leasing business equipment is not without its disadvantages. The next section will discuss the potential negatives of leasing business equipment.
Higher Total Cost
The overall lifetime cost of leasing business equipment is generally higher than the lifetime cost of purchasing the same business equipment outright.
To offer a hypothetical example, let’s say that the purchase price of a specific piece of equipment is $2000. The standard monthly lease payment is charged at roughly $40 per month for every $1000 of value. If you leased the piece of equipment for a typical lease term of 3 years, at the cost of $80 per month, at the end of the lease term, you will have paid $2,880 for the use of the business equipment, which would have cost $2000 to purchase outright.
Monthly Expense
When leasing business equipment, the business owner is required to sign a contract stating that they will make the monthly lease payments on the equipment every month for the length of the lease term, this means that the business owner must pay the agreed upon amount every single month regardless of whether the business is producing a profit or not.
Lack Of Equity
When leasing business equipment, you are essentially paying for the privilege of using business equipment that is owned by another entity. Because the business owner does not actually own the business equipment, they cannot claim the value of the equipment as a business asset, nor can they liquidate the equipment to raise capital.
Contractual Obligation
When leasing business equipment, the business owner is required to sign a contract obligating them to lease the equipment at the agreed-upon monthly rate for a specified period of time, the business owner is bound by these contractual obligations for the life of the lease, regardless of whether they are using the equipment for the entire lease period or not. While some lease contracts may contain a clause that allows for early lease termination in the event that the leased equipment is no longer needed, activating this clause almost always requires the payment of steep early termination fees.
Leasing Business Equipment: Pros & Cons At A Glance
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Choosing The Right Solution For Your Business
Whether to buy or lease the business equipment your company needs will depend mainly on the unique needs and financial circumstances of your particular business.
We strongly encourage you to thoroughly explore each option's benefits and potential downsides before making your final decision.
ALFA Business Managed By Masters program allows business owners to leverage Print ALFA’s partnerships with business equipment manufacturing titans such as Lexmark, Hewlett Packard, and Kyocera. As a result, ALFA Business customers have the opportunity to buy, or lease, the most modern, top-of-the-line business equipment on the market, including Multifunction Printers and copiers. Best of all, ALFA business customers can enjoy the added peace of mind that comes from knowing that business equipment that is leased or purchased through the ALFA Business Managed by Masters program is backed by some of the best lifetime service, maintenance, and troubleshooting support that the industry has to offer.
In addition to business equipment sales and office rentals, ALFA Business also provides document storage and shredding services at your facility or ours, which can help eliminate the cost of obtaining and maintaining expensive document shredding equipment.
Visit ALFA Business to learn more about our full suite of small business solutions, including business equipment sales and leasing, document storage and shredding services, document management software, print tracking, fully managed IT solutions, and low-cost VoIP services.
Contact Print ALFA to learn more about the myriad of tools that we can provide to help ensure that your small business is equipped with all of the resources, services, and supplies needed to help get your business off the ground. Our team of experienced professionals is here to help you keep your day-to-day business operations running smoothly and to ultimately improve your bottom line so that your small business has the room it needs to thrive and grow.