“Should I purchase or lease equipment while starting my small business?” is the first question that comes to mind when a person is just starting out with a small business. However, the initial answer is “depends on your financial capacity to invest!” Because, if you have a sufficient amount of money or capital, buying doesn’t seem to be a bad idea as well.
However, if we go in-depth and see things analytically, it is a bit challenging to decide whether to buy or lease the equipment for your small business. Therefore, this comprehensive guide will help you to clear your confusion and determine what’s best for your small business.
Leasing or Buying?
The answer is not that simple because there are a ton of factors that can easily alter it. It primarily depends on the industry where your small business will work. Business needs largely vary as per the industry where it operates. Additionally, your location and target clients are a few other factors that come hand in hand with your industry of operation. Thus, even if two businesses are working in the same industry, their requirements vary according to their location, the demands of customers and the financial capability of the business owner.
Considering the above points, if you are planning to lease equipment, let’s first understand some important things.
There are mainly two types of lease,
- Operating Lease: Equipment is leased for a short span of time.
- Capital Lease: Also known as Finance Lease. It includes a longer rental period and usually has a contract. Once the lease contract is over, the user (small business owner) will buy the equipment.
In simple words, whether you choose Operating Lease or Capital Lease, you have to make payments periodically for the leased equipment.
Why Do Startups or Small Businesses Lease Instead of Buying the Equipment?
Leasing seems to be cheaper than buying when you plan to use the equipment for a short period of time. Because, initially, leasing equipment saves investment funds and enables you to invest the saved money in other progressive tasks. However, it may cost higher in the longer run.
So first, let’s take a look at some important benefits of leasing equipment before understanding the disadvantages of leasing.
Less initial investment
The biggest benefit of leasing equipment is that it enables you to get the required equipment at the least amount of money. In many cases, leases need a little or no down payment. Thus, a small business owner can have costly equipment without actually impacting the budget and investing a lot. Lower initial investment means you can save the spare funds for unexpected business expenditures and business growth plans.
Any business needs continuous growth. Updated software and equipment fuel this growth to a large extent. What’s the use of having a licensed copy of Microsoft Windows 7 when it is already discontinued by the vendor? Such outdated software leaves your business exposed to online vulnerabilities and cyber-attacks. While leasing equipment, you can tell your requirement to the lessor and make a contract for continuous maintenance of equipment and software upgrades. Up-to-date equipment greatly helps to streamline business tasks and maintains a constant wave of productivity.
A great choice for manufacturing businesses
If you want to establish a small manufacturing factory that produces some parts of a machine, you will require a Lathe Machine or CNC (Computer Numerical Control) machine that costs way higher (Lakhs of Rupees) than equipment like computers and laptops. So, leasing such costly equipment saves a great pie of your initial investment and helps you kick-start your small production factory with confidence. Likewise, you can specifically make a contract with the lessor for maintenance and repair of these heavy machinery to avoid any extra costs of the same.
Additional benefits of leasing equipment for your small business include,
- No maintenance costs,
- Manageable payments,
- You have the option to purchase the leasing equipment
Now, let’s explore the dark side of leasing.
Here are some critical disadvantages of leasing.
Extra pay for the long run
Depending on the span of your lease term, you may end up paying more than the actual cost of lease equipment. Additionally, if you plan to buy the leased equipment after the contract ends, the cost is also high as compared to buying it outright.
Strict terms and conditions
Lease contract terms and conditions are fixed, and when you want to end the contract, you have to pay the entire money for the contract period upon termination. Additionally, in the case when lease equipment is not that much used in your business, you have to pay the full lease amount for the decided period whether you use it or not.
Likewise, some lessors provide repaired or refurbished equipment that is not up to the mark when it comes to performance. Frequent lags, breakdowns cause more idle time and add up to extra hours of pending work. So, even if you lease, make sure to test the working of equipment properly.
Advantages of Buying New Equipment
Buying the equipment is a good idea when you plan to use it for a longer time period. If you plan so, here are some advantages to buying equipment for your small business.
You are the sole owner
It will be your decision if you want to sell it or keep it after you no longer need the equipment. Your equipment will be the business asset when it is brand new and supports upgrades to match up with changes in business requirements. Thus, purchasing the equipment enables the business owner to customise it if the business demands new upgrades.
Who doesn’t want to work with a brand-new superfast computer? Thus, it is one of the best advantages of buying new equipment. Having a good quality of work infrastructure enables employees to work with full potential, which ultimately increases their productivity. They don’t have to worry about frequent breakdowns or system issues while working. Even though there will be some issues, the frequency of issues is much lower with new equipment as compared to the refurbished lease products.
Moreover, buying new equipment promotes a good working environment and encourages employees to work efficiently.
While you spend money on buying new equipment, you may get tax benefits like grants, depreciation deduction, tax write-offs, etc. Additionally, you can claim tax deductions for depreciation, maintenance, repairs, and insurance on equipment as well.
There are also some downsides of buying that you must understand while making a move. Following are the disadvantages of purchasing equipment for your small business.
The disadvantages of buying equipment are:
Not recommended for shorter use
Paying a large amount of money just for a few months of use is highly dangerous for any small business. According to a recent study by Startup Genome, 11 out of 12 startups fail. Therefore, considering such real-life studies, it is not a good idea to buy equipment upfront before setting up and streamlining your business.
Every business has initial days of learning that include understanding the competitors, customers, market approach, and business growth. Therefore, it takes time for a small business to completely get on track and stabilise a constant flow of profits. In such a case, you must invest your hard-earned money carefully and proactively.
Higher initial investment and maintenance costs
It is clear that buying requires money up front, whether your business is small or large-sized. Sometimes it happens that technology changes or customers’ requirements change and your equipment don’t support any kind of upgrades. In such scenarios, the existing equipment becomes absolute, and you have to buy new equipment or lease it. These types of conditions bring a significant amount of pressure on business owners and end profits.
Additionally, you have to maintain the equipment periodically to keep it smoothly running. This maintenance cost varies according to the equipment purchased and the type of upgrades that the equipment needs.
Thus, considering the whole scenario, leasing and buying have its benefits and drawbacks. However, above-mentioned factors will help you to buy or lease equipment for your small business. Factors like period of usage, equipment maintenance, customer requirements, present condition of the business, etc. should be considered before making the final decision of buying or leasing equipment. Likewise, if your equipment requirements are small and you have enough funds, or you can apply for a low-interest loan, then the buying decision is good to save money in the long term.
However, if you are short on funds and require a large amount of equipment like 20 computers at a time, then leasing seems to be a better choice. In the end, the growth of your business is heavily dependent on such decisions because small things matter while starting out a new business. After significant profit gain, you will have a sufficient amount of funds and confidence to put money in the right equipment that will further boost your profit in the long run!
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