Quick Guide: How to Choose Between Leasing or Buying When Your Business is Ready to Expand
So, you’ve been in business for a while and things are looking up. Customers can’t get enough of your product, and you’re running out of space to manufacture and distribute. You have no choice but to expand by looking for larger premises, and bigger equipment. Every successful manufacturing business eventually finds itself at this very fork in the road, they have to figure out how to scale up with new equipment in order to make more gizmos and gadgets. Considering that it takes strong sales to arrive at this milestone, the decision to buy new equipment sounds like it should be a no-brainer. Except… it never is, because scaling up is usually expensive.
Don’t Take it Lightly
Figuring out how to expand and invest in new equipment is challenging because it almost always involves financing. If you finance your operations the wrong way when your business is still young, you could end up incurring costs that place a detrimental burden on future growth. Financing new equipment ultimately boils down to two choices – should your company lease its new equipment, or should your company buy its new equipment? Each one of these alternatives has its own advantages. Making the right choice depends on what your business environment is, and what your overall company objectives are.
When to Lease Equipment
The best time to lease equipment is either when the expansion is going to put serious pressure on your budget, or if you have a lot of equipment to acquire at one go. Leasing deprives you of acquiring any equity in the equipment you purchase, but it gives you access to the equipment’s utility anyways, so it’s still possible to expand your operations with a lease.
The most strategic benefits of leasing equipment are:
- Leases don’t require a lot of upfront capital.
- Leases let you give the equipment a test-run without keeping it forever.
- Vendors usually offer to perform routine maintenance on leased equipment at minimal costs to you.
- Leasing for short-term periods costs less than buying.
When to Buy Equipment
The best time to buy equipment is when you have absolute confidence in the utility of your choice, and your ability to guarantee sales. If you have no doubts about the revenue that your company will generate, then there’s a strong possibility that you can afford to buy new equipment in order to claim it as a company asset.
The most strategic benefits of buying equipment are:
- The equipment belongs to your company so you can delete it at will.
- Buying equipment outright costs less than leasing in the long-term.
- Depreciation on the equipment can be offset as an expense when filing Taxes.
- The equipment will add to the company’s value as an asset listed on the balance sheet.
Making a choice between these two options is a matter of being efficient. If you’re completely stumped about what to do even after considering the pros and cons for both, then choose the alternative which allows you to maintain as much cash in your working capital as possible. At the end of the day, cash is king. The more cash your company holds from one fiscal period to the next, the better positioned it is to withstand unexpected problems or events in your business cycle.