Lease or Purchase?

In the process of getting established in the marketplace, start-up small business owners often have to spend a significant amount of money to build the required infrastructure to operate their respective business.  One of the first decisions that have to be made is whether or not to purchase this equipment outright and own it completely.

While the purchase process and ownership of the latest and greatest equipment, with all the bells and whistles attached is satisfying on a visceral level, it may not be a sound business decision.  Another option may be available that should be considered.

Leasing equipment is one option that should be considered.  While the company does not own the equipment, the initial capital outlay will be considerably less and the “life-cycle” costs may be lower as well.  Prior to making this decision, an evaluation of the pros and cons must be undertaken.

Purchase: (Pros)

• Own the equipment outright
• No restrictions on use (this could be good or bad)
• No ongoing monthly payments (unless you count the start-up loan)

(Cons)

• Lots of upfront expense
• What happens if it breaks?
• Technological obsolescence?

Lease: (Pros)

• Minimize upfront capital expenditure outlay
• Spread financing costs over the life of the lease (3-5 years depending on equipment type)
• Diversify sources of capital at attractive rates
• Avoid owning technologically obsolete equipment
• No responsibility for equipment disposal
• Build company credit
• The option to purchase at the end of the lease

(Cons)

• Monthly lease payment (potential cash flow issue)
• Possible restrictions on use
• Possible penalties if conditions of the lease are not honored

The bottom line is to look at every option that is available to you and make an informed decision on the costs and benefits of each option.