NAVIGATION

Should You Buy or Lease Your Business’s Assets and Equipment?

Your business will need special assets and equipment to operate—knowing to buy and when to lease the assets you’ll need will impact how well your business will succeed. Here are guidelines to help you determine which assets you need, how to pay for them and whether you should buy or lease.

Know the assets and equipment you need

There are three basic categories of business assets: tangible, intangible and intellectual property. The first step is figuring out which assets will help your business succeed.

  • Tangible assets — like property or equipment — are used for regular business activity and lose value over time.
  • Intangible assets are the things you can’t touch, but still contribute to the overall value of your business — things like your business reputation, brand or influential network.
  • Intellectual property is a type of intangible asset that includes trademarks, patents, logos, websites, domain names and software. Intellectual property is often protected by copyright or trademark protection.

Decide to lease or buy

Once you have identified the assets your business needs, you can decide how best to acquire them.

Leasing

Leasing can be a good option if you need a lot of equipment upfront and or if the equipment you need is very expensive. Every lease can be structured differently, so carefully review the details of your offer to make sure you’re getting something that works for you.

  • Benefits of Leasing:
    • Needs less cash or credit upfront
    • Short-term leases let you test out the equipment
    • Maintenance is sometimes included at no extra cost
    • Lease payments for business assets are typically tax deductible
  • Disadvantages of Leasing:
    • The lifetime cost is normally higher than buying
    • Replacing it when the lease is up could be expensive
    • Depreciation of leased assets typically isn’t tax deductible
  • Leasing Tips:
    • Confirm the details of a lease. There are two general kinds of leases: operating leases and capital leases. Since the accounting treatment is different, the kind of lease you use can have a significant impact on your business taxes.
      • Operating leases work like a traditional rental. Since you don’t own the asset, payments are treated as operational expenses.
      • Capital leases work more like a loan. Since you own the asset, it gets added to your balance sheet, and you can claim depreciation and interest expenses.
    • Leases sometimes have buyout options that let you fully purchase the asset at the end of the lease.
    • The length of a lease can vary. Typically, shorter leases have higher monthly payments. If you want to leave a lease early, you could face steep early-termination penalties.
    • Best practice: have an attorney review a lease with you before signing.

Buying

Buying equipment can be a good option if you have enough cash or credit available and you’re confident you’ll be using the assets for a long time.

  • Benefits of Buying:
    • You can claim depreciation on your taxes
    • The lifetime cost to buy is usually less than leasing
    • You can count it as an asset on your balance sheet
  • Disadvantages of Buying:
    • Needs more cash or credit upfront
    • Less opportunity to “test out” the asset
    • You could be fully liable for maintenance and replacement
  • Buy with cash or credit?
    • Buying with cash means you’ll own it in full right away, but it also means you’ll have less cash available to cover operating expenses.
    • Loans distribute the total cost over a longer period and can help preserve your cash reserves. However, you’ll pay more in fees and interest than buying outright with cash.
  • Consider buying government surplus
    • Purchasing surplus goods from the government can be easy and affordable. Just about any tangible asset your business might need is sold by the government at or below what you’d pay on the open market. State governments tend to have a single auction site online, while the federal government has several. Use this list of federal government auction sites to start your search.

For more information or help with acquiring assets needed for your business, contact the Economic Development Collaborative-Ventura County. Conveniently located in Camarillo, California, we’re here to help.

Source: SBA.gov

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