Leasing or Financing IT Equipment: How Can You Maximize Capital?
Is leasing or financing IT equipment better for your bottom line? What features should you look for in a lease to maximize your IT budget?
Examining Your Business Model
There are several payment options for IT equipment, and it's important to choose the option that works best for your business. Financing means securing a loan to purchase the equipment you need. This loan could be secured by a personal guarantee or some other asset that you or the company owns. Defaulting on the loan will mean credit trouble, major expenses and the loss of the asset that you used to secure the loan.
Another financing option is a dollar buyout, which involves a down payment and then monthly payments over a period of time. At the end of that period, you will own the equipment. A dollar buyout is secured by the equipment you are purchasing. If you default, you will lose the equipment. It is similar to a car being repossessed if you stop making your car payment.
Leasing allows you to use the IT equipment for a lower monthly cost than buying it outright or financing. The catch is that at the end of the lease, you must return the equipment. It is similar to a car lease where you can make lower payments, but you only get to drive the car for a few years and you don't own it outright at the end. The lease terms will determine the final cost, but leasing equipment can help you maximize capital, especially if you are a younger company with limited cash flow.
Leasing vs. Buying IT Equipment Comparison
Whether you are just starting your business or your 1,000-employee operation needs new computers or other technology, it is important to take a look at the benefits of both leasing and buying.
You can keep your equipment from becoming obsolete by leasing instead of buying. You pass the financial burden of obsolescence to the equipment leasing company instead of your own company. The ability to have the latest equipment is the top benefit of leasing. After your lease expires, you are free to move on to equipment that is newer, faster or cheaper.
With leasing, you eliminate the need for a large cash expenditure over buying equipment outright. Instead, you have a pre-determined monthly line item, which helps you budget more effectively. You also pay nothing up front, which helps if your business struggles with cash flow and you need to keep a large cushion in your budget.
You can also acquire more sophisticated technology by choosing a lease since your payments are spread out over time. This allows you to go toe-to-toe with your competitors and offer the same services, even if you are a smaller business.
Although leasing can help with cash flow at the beginning of the lease, it is almost always more expensive overall by the end of the lease compared to purchasing IT equipment outright. In addition, you are obligated to keep paying on the lease until it ends, even if you stop using the equipment due to business changes.
Buying or Financing Benefits
Buying or financing (where you own the equipment at the end of the loan) IT equipment is easier than leasing and doesn't involve as many complicated terms or agreement to a maintenance schedule. It is also usually cheaper.
When you own the equipment, you get to determine the maintenance schedule instead of adhering to a leasing company's specifications, which can quickly become expensive.
Buying your IT equipment also allows you to deduct the full cost of newly purchased assets, saving you money at tax time.
Buying or Financing Downsides
The initial outflow of cash or maxing of your credit lines might be too much for your business to handle, especially if they are needed in other areas such as marketing or software.
The biggest downside to buying is that eventually, you are stuck with outdated equipment. IT equipment becomes outdated quickly because new technology is always just around the corner. Your business could be falling behind your competitors if you are using slower and less agile machines because you bought them instead of leasing them.
Ultimately, the leasing vs. financing/buying decision is up to you. If your equipment needs are relatively small, and your business model doesn't anticipate much change in the next several years, you are probably better off to buy if you have the money. It will cost you less in the long run. However, if you require a substantial amount of equipment that will need replaced sooner rather than later because of business growth and pivoting, leasing might be the option for you.