Posted on: Wednesday, June 7, 2006
Leasing what company needs has advantages
By Rhonda Abrams
Congratulations, you're starting or growing your business. But you've got to spend money on equipment, computers, furniture and vehicles. With each, you face the same question: Should you buy, or should you lease?
As my business has grown, I've purchased and leased equipment. Leasing is always tempting because I spend less money now. Having more cash now enables us to do marketing and expand. But leasing costs more in the long run — sometimes a lot more. Do I really want to spend $20 a month to lease a chair I can buy for $200?
Over the years, I've learned some of the trade offs between buying and leasing.
More money in the bank. Buying ties up more cash now than leasing. Cash is one of the most precious assets a company has. Money means time — time to stay in business, time to grow.
Flexibility. When you buy something, you're stuck with it, even if your needs change or technology improves. A good lease may allow you to update or expand your equipment or furniture, or perhaps get out of the commitment altogether.
Lower startup costs. Leasing enables you to get a lot more now for a lot less. If you have to expand very quickly, leasing can make that possible. Buying 20 desks can cost many thousands of dollars; leasing those desks may only be a few hundred dollars a month.
Easier maintenance and support. It may be less expensive and less hassle to lease equipment if the lease includes ongoing maintenance, updating, even training and technical support. This is particularly true for industrial equipment and technology.
A lower total cost. The lifetime cost of many things is considerably cheaper if you buy rather than lease. A desk chair may cost $200, and you may keep it for many years. That same chair may cost $20 a month to lease, making its one-year cost $240.
Reduced overhead. With a lease, you have monthly payments regardless of your income. If you only make purchases when you have cash in the bank, you have lower monthly fixed costs.
Flexibility. You're locked in to most leases for a certain period and can't easily get out of them. If you move, go out of business or your needs change, you still have payments. If you own your own equipment, furniture or vehicles, you can take them with you or sell them.
You've got an asset instead of a liability. Once you've bought something, it's on your books as an asset of the business, increasing your company's value. A lease payment, however, shows up as a liability, decreasing your company's value.
Tax advantages. The IRS allows you to write off, or "expense," a large amount of purchases (including furniture and certain equipment, computers, etc.) every year.
OK, so there are pros and cons of buying and leasing. What do I recommend?
Buy less expensive items; lease more costly ones. It doesn't make much sense to lease a fax machine or printer — they're only a few hundred dollars. But if you need a major piece of equipment, don't tie up your cash.
If you're unsure of your plans, get short-term leases. Don't burden yourself with a lot of stuff you won't know what to do with.
Finally, never get more than you need and can afford. Use the dining room table or your kid's old desk until you start making money. Cash in the bank beats beautiful furniture any day.
Rhonda Abrams writes books for entrepreneurs. Her newest is "Winning Presentation in A Day." Register for Rhonda's free business tips at www.PlanningShop.com.