Equipment leasing vs buying

Having the right equipment is essential for the success of any business, but access and use of equipment can be achieved in two ways: outright buying or through equipment leasing.

Which route should your business go down?

The answer, as it always does for financial business considerations, will depend on the particulars of your situation. For example, business equipment leasing can be a good option for those with limited access to working capital. While purchasing equipment could be the smartest option for certain, established companies. 

To get you started in making the right decision, we’ve laid out our guide to equipment finance leasing vs buying.

What is equipment leasing and buying?

As with many household or personal items and pieces of equipment, there are two options for a business:

• Purchasing or buying the equipment.
• Engaging in a business equipment leasing arrangement.

Purchasing the equipment outright means that the business takes full ownership of the item upfront and adds it as an asset to its balance sheet. There is necessarily an outlay of the entire amount of the equipment upfront, regardless of whether that amount is financed through other solutions or lines of credit.

Equipment leasing is an independent arrangement where the equipment is rented for use for a period of time, at a set cost and with contracted terms/conditions. 

There are generally considered to be four distinct types of equipment lease arrangements:

Finance Leasing

These equipment leasing arrangements are tax deductible and include ownership of the items, which means it’s included on the balance sheet. At the end of the leasing term, the business may be purchased for an agreed amount. 

Operating Leasing

Also called rental, the ownership in operating leasing arrangements stays with the lessor. It cannot be included on your business’s balance sheet.

Commercial Hire Purchase

In this arrangement, the equipment is owned by the business leasing it and included as an asset on their balance sheet. Likewise tax deductions and depreciation deductions can be claimed. At the end of the hire term, the business can purchase the equipment if residual value remains or else ownership can be transferred fully. 

Chattel Mortgage

In this form of business equipment leasing, the items are owned by the business with the interest component of the mortgage being tax deductible only. Depreciation deductions can be claimed and the equipment can be used as collateral for secured loans. At the end of the loan (finance) term, your business retains ownership of the equipment. 

Equipment Leasing: advantages and disadvantages

Advantages

Lower initial cost

The main benefit of leasing equipment is that the initial cost of equipment leasing is significantly less. Moreover, more often than not, you are not required to make a down payment either. For businesses with tight cash flow or limited access to capital, this can make a huge impact in the ongoing operational capacity of a company. 

More flexible terms

Buying equipment outright is fairly straightforward, but to that effect also less flexible. Equipment leases are still easy enough to get and offer flexible terms in a variety of ways. If your business lacks a credit history or has a less than favourable one, you could negotiate accordingly to ensure you’re still able to lease the required equipment. 

Tax considerations

Business equipment leasing is still deductible from your tax return as a business expense, which is favourable for just about all companies. 

More flexibility in equipment

Leasing equipment allows you to upgrade, change or otherwise stop utilising the equipment as necessary. As long as you are not breaking the terms and conditions of your leasing arrangement, you’re free to start leasing something newer, better or different as required. 

Disadvantages

Higher cost overall

As mentioned above, leasing equipment means less of an expense initially but it will likely cost more over the long run. While it may still be the more sensible option for many businesses, especially those with cash flow issues, there is a financial cost to leasing. 

Lease terms

As part of your lease equipment you may be obligated to make payments throughout the entire term as outlined in the contract. It doesn’t matter whether you’re no longer using or need the equipment. If you do terminate the contract early, there may be associated fees or penalties. 

Ownership

Leased equipment is not owned by you or your company and in many cases this can present a disadvantage compared to buying equipment. 

Buying Equipment: advantages and disadvantages

Advantages

Ownership

Unlike equipment leasing, buying equipment means you own the items outright. There can be some drawbacks, but in many cases this is an advantage. 

Tax implications

There are some tangible tax incentives for buying equipment. From deducting the cost to possible depreciation deductions, it’s imperative to consider the tax implications of buying vs leasing equipment. 

No ongoing payments

Unless you access a different line of credit or business loan, there are no ongoing payments or obligatory terms when you purchase a piece of equipment outright. 

Lower cost over the long term

In contrast to leasing equipment, it’s often more economical over the long term (think: life of the asset) to buy it. This is especially true for those with access to more than sufficient working capital. 

Disadvantages

Higher initial cost

While the longer term costs may be less, buying equipment does require a substantial investment upfront. For those businesses with cash flow issues, this can pose its own problem and even require consideration of alternative financing options.

Lack of flexibility

Once you have taken ownership of the piece of equipment (assuming it is not faulty or otherwise eligible for returns/refunds) it is yours. Unlike equipment leasing, there is no option for upgrading. Nor, should you cease using it, is there any option to recover some of your costs. Though on-selling it, sub-leasing or some trade-in deals may mitigate this risk somewhat. 

For custom equipment finance lease advice, speak to ScotPac

ScotPac has been providing businesses across Australia with customised financial advice, including on equipment leasing, for many decades. Our experts know how to find hidden value with flexible financial solutions without having to relying on the traditional banks and their rigid instruments. 

For more custom equipment finance leasing advice, make sure to reach out and speak to us today.