Before you lease or buy an asset for your small business, consider these seven factors.

When you own an asset, you have full control – but you also have full responsibility for its upkeep.

Small-business owners have a big choice to make when it comes to fixed assets that support business growth, like vehicles, equipment, and technology. Buying and leasing each have advantages and disadvantages – and there’s no one-size-fits-all solution. Consider these factors to help you decide which option is best for your firm’s next big acquisition.

1. Duration of Use: Durable goods like heavy machinery, furnishings, and vehicles may serve your business for many years, which can make them good candidates for purchase. Other acquisitions may provide utility only for a particular season or project. For big-ticket items that you will use only briefly, a lease is likely better. If you think the asset may continue to offer value, consider asking the lessor if a buyout option is available at the end of the lease.
2. Changing Technology: How quickly assets become obsolete depends a lot on your industry. While construction equipment or a fleet of commercial vehicles might meet a firm’s needs for a long period of time, highly specialized equipment and technology in a quickly changing sector is more liable to become outdated within a few years. This especially applies to IT, high-tech manufacturing, and research. If staying competitive in your field means upgrading to the latest technology every two or three years, leasing is often best if and when it’s an option.
3. New Versus Preowned: For items that have a longer shelf life, buying a preowned version may offer big savings. Choosing a used vehicle or piece of equipment can help you avoid dipping too far into your cash reserve, or it can allow you to secure a more manageable loan than a brand-new item would require. If having cutting-edge technology is important in your industry, the assets you need may be only available new, likely making a lease more cost-effective.
4. Maintenance and Modifications: In some cases, leased assets come with a comprehensive maintenance contract, so you don’t have to worry about paying out of pocket for repairs and routine servicing. That can save you money as well as the hassle of finding qualified technicians. However, such lease agreements often come with restrictions on modifying equipment to suit your needs. When you own an asset, you have full control – but you also have full responsibility for its upkeep.
5. Financing Options: Certain assets may be prohibitively expensive to buy outright. Even if you choose to finance the purchase, you could still face significant upfront costs, though in some cases the long-term value of your purchase will justify the initial cash outlay. Leasing is generally less expensive in the near term, but for certain goods, leasing may eventually become more expensive than buying and financing. Your choice will depend upon the leasing and financing options available to you, as well as your firm’s liquidity and cash flow.
6. Tax Benefits: Tangible business assets can also provide opportunities for tax benefits. Your decision to buy or lease can impact the tax treatment of those expenses. For instance, the full amount of a lease payment is generally deductible during the year it’s paid, but if you take out a loan for an item you may only be able to deduct interest payments and depreciation. Check with your accountant or tax adviser to better understand how choosing to lease or buy would impact your business taxes and your overall financial position.
7. Changing Gears: If you rapidly shift the focus of your business and find that a given asset is no longer useful to you, your next steps will depend on whether it’s leased or owned – and on what specific terms. If it’s leased, you may have an option to cancel your contract, but you’ll likely incur a sizeable early termination fee. If you own it, you may be able to sell it, but if it was financed with a self-collateralizing loan, you’ll have to cover the remaining balance.

What About Real Estate?

When it comes to commercial space, a whole new set of considerations comes into play. If you’re in the market for a new storefront, office space, or manufacturing facility, look into the pros and cons of buying vs. leasing commercial properties.

Keep Growing

As you’re strategizing about your next big investment, reach out to your financial institution to explore all your options.