The next time your business needs new equipment or some other form of technology, the question arises should you buy it or rent it or lease it at that particular point in time. These three options are always there, and you must consider your own financial situation, the current business scenario, the overall economy as well as the future outlook. Your company’s internal factors, which affect your own business affect your decision-making, as well as the external factors related to the overall economy like the changes in demand, can also affect your business. These factors affect whether it is a good time to invest in new business equipment or not. If it is a good time, then the other factor to consider is whether you are in a position to actually buy the business heavy equipment or should you look for some equipment financing or equipment leasing.
What is Equipment Leasing?
A lease is an extended rental agreement where the equipment owner allows another party to operate or use their equipment in exchange for lease payments that are periodic. The owner is known as the lessor while the one who is using the equipment is the lessee. Equipment leasing is one of the most popular options available for companies of all sizes all over the world.
Reasons for Leasing
Most of the companies finance their equipment by either equity or by debt. Many of the companies who have the ability to purchase equipment may still prefer to lease as their tax situation may not allow them to benefit from depreciation. Moreover, many companies who are involved in business with rapidly changing technology, it allows them to exchange their equipment for better or newer models.
There are many reasons why some businesses might simply choose to opt for business equipment leasing as opposed to buying it. The reasons are:
- To conserve the working capital.
- For income tax considerations.
- The implications of financing reporting, for example, the option of using leasing as an off-balance sheet financing.
- There can be 100% equipment financing through leasing.
- To remove the threat of technological obsolescence.
- It gives the ability to be flexible by not getting into the commitments of ownership.
- It is usually cheaper than rental options.
- Leasing is a cheaper option than renting equipment and equipment loans.
- Frees capital to be used elsewhere.
- Allows the user design structured agreements for leasing that suits your needs.
- Helps in predicting the cash requirements for the future.
Why should you rent equipment?
If you decide to rent equipment, as opposed to buying it or leasing, it means the dealer would be the one who would be maintaining the equipment, and the contractor thus avoids the expense associated with the upkeep of the equipment. In case the machinery breaks down or stops working then the dealer would be the one responsible for fixing it, and if the repair of the equipment takes too much time, then the dealer may also exchange the broken or faulty equipment with a different one. Most of the times, people rent machinery or heavy equipment which is too expensive to buy or when they only require it for a certain period or for a specific job. Whether it is a good time to rent equipment or not also depends on how the business is doing, for example, doing times of uncertainty most business avoid taking on more expenses. Renting may prove to be more expensive because of the flexibility and because it involves less risk as well.
Difference between Rent and Lease
While leasing, as defined earlier refers to a contract to rent an asset, which can be machinery, building or land for a particular period and for a certain period of time. Renting, on the other hand, involves a shorter time period, which may be one-year maximum but the option usually exists to extend it at the discretion of both the parties. It is basically a month to month agreement. Renting is a better option for shorter periods of time, where you do not need the asset for the business throughout the year, while leasing is a better option if the asset is an important part of your business and is integral to be there.
Factors affecting your decision to lease or buy equipment
There are many factors which can help to determine whether you should buy, rent or lease equipment and whether you should do so right now or later. Buying is obviously the third option apart from leasing and renting.
Your current financial situation
Like mentioned already, the first and the foremost deciding factor should be what your affordability is like. The only way to determine if it is a good time for renting equipment or applying for an office equipment lease is to see what you can afford. You need to see whether you have the cash in order to pay it upfront or whether you need to look for options for renting equipment. Even though buying requires a large one-time cash outlay but renting equipment can end up costing you more. Plus, when you own equipment, you can also get a return on your investment when you end up selling it eventually. If you feel your current financial situation is not ready for tying up a large sum of money, for now, you can look at other options such as:
- Buy used equipment of good quality. If you purchase equipment that is used but is in good quality, it can prove to be a cheaper option than buying new equipment and may also prove to be more cost-effective than renting, in the long term.
- Look for equipment financing. You can look for options where you can get equipment loans from certain financial institutions, or even some equipment companies offer financing. This way, you can save your capital to run your business, and your loan payments may even prove to be cheaper than rental payment or lease payments.
- Look for leasing equipment with options to buy. You may also look for office equipment lease options where you also have the option to buy; this way it may even offer you to determine your own monthly payments you are willing to make and right in the end of the lease period, you can decide whether you want to renew the office equipment lease, or to buy or simply return the equipment if it is no longer needed. Moreover, you also get tax benefits from leasing.
The cost of buying heavy equipment vs the cost of renting
When you are deciding if it is a good to time lease equipment, you must also consider whether it will be more beneficial if you simply purchase the business heavy equipment. When it comes to owning equipment, you have to see the operating costs, the maintenance costs and insurance, amongst others. Renting or leasing on the other hand, is generally an all-inclusive cost.
The duration of your project
The duration of the project or the frequency with which you may require office equipment may also determine whether you should go for leasing equipment right now or not. If it is needed right away, then you should look for the cheapest options available and simply get it. Most of the times, if the equipment is multipurpose equipment that can be used for various purposes, then it is probably better to buy it since it can come in handy for other uses as well.
The availability of the equipment
You must consider whether the equipment you need is available in the market right now? Maybe you might be getting a great deal on the equipment funding or leasing as of now, but later on, it might change, and you might not even get the same model you require.
Advantages of leasing or renting equipment
There are certain benefits to be gained when a company chooses to go for leasing or renting business heavy equipment as opposed to buying it.
- You do not have to pay the whole cost of the equipment at one go and this way you do not use up all of your cash and use it elsewhere in the business.
- You get to use higher standards and quality of equipment which might have been not affordable for you to buy at all.
- Since you pay for the equipment over a period of time, it helps you to budget your expense over the future.
- The cost of the equipment can be spread over a longer period of time in order to match with your income streams.
- You may also deduct the cost of the rentals or the lease from your taxable income.
- The risk has to be borne by the leasing company.
- In case you want to replace your equipment or upgrade it, you simply make an adjustment to the payment you make on a regular basis rather than spending a lump sum amount again.
- It helps to keep you updated with the latest technology.
- It helps the business to have access to certain equipment which they do not need on a regular basis.
Disadvantages of leasing or renting equipment
Like with everything else there are also certain drawbacks of using the lease or rental agreements which are:
- It is usually more expensive in the long run, as opposed to you buying the equipment.
- You may be required to give a deposit or make some advance payments in order to get the lease.
- Some lease or rental agreements can be complicated to manage as compared to buying the equipment outright.
- Leasing an equipment does not mean you own it, although you may be able to buy it at the end of the lease term.
- Owning the equipment means your workforce will be better equipped to operate it, if you change the equipment often you might have to train them from scratch.
Verdict – So what is a good time to lease or rent?
This leads us to the main question again, so what is the best time to lease or rent business heavy equipment? The answer varies from business to business and from situation to situation. As mentioned above, there are so many factors that a business owner must keep in mind when deciding whether it is the right time to avail the option of leasing or renting or maybe even consider buying if it is worthwhile. In order to make the final decision, the business must ask itself the following questions:
- Is the requirement for the equipment for now? If the business needs the heavy equipment in order to make sales and if it ends up generating profits for them, then they should do their cost-benefit analysis and go ahead with it.
- What are the interest rates? Interest rates may certainly affect the lease payments which will be offered to the business, if the business feels that the rates will eventually fall down in the near future and waiting to lease later is a better option, then the business should certainly go with that.
- Is buying a better option? The business has obviously done their math. If they find that buying now, or maybe buying in a few months times will be better than leasing now or later, then they should go ahead and buy the equipment – provided it is not of temporary use.
- What are the business’ cash flows like? Lastly, they must consider whether they are in the position to take yet another monthly expense or if they can wait it out. At the end of the day, it is the business’s call.