Should you lease or buy equipment?

Many small business people wonder whether it’s better for them to buy or lease capital equipment for their businesses. Your options regarding leasing or buying depend upon the nature of your particular business, but there are nevertheless a few guidelines you can follow to help you decide what you should do.

If you have the money available, and the item is really necessary to your business, then it will usually benefit you to buy the item outright. If there is no way you can find the finance (i.e., you have no money) then you will have to finance the purchase out of cashflow, which means leasing it.

A caution
A special note here: Don’t buy an item at the risk of not being able to meet your bills in the next month. Only use surplus cash—and then only if it really is ‘surplus’, not just temporarily in the bank account. You should work all this out in terms of your cashflow forecast and your forthcoming liabilities.

If the options are not so clear cut, then you have some thinking to do. Ask these questions:

How often will you use the item?
If the item is only going to be used every now and then, there is no real point in buying one. It will lie around for most of the year unused and is therefore a waste of your resources. So lease or hire the equipment when you require it.

What else could you do with the money?
Could you earn a better rate of return on the capital required for the item if you invested it in your business? Your business might be at the stage where a few thousand ploughed back in as working capital will give you a far better rate of return than tying up the money in equipment. For example, would the money be better spent on marketing? In this case, it might pay you to lease.

The effect on net profit
The bottom line is always: how will your decision to buy or lease affect net profit?

Let’s take a simple example, and calculate the net profit results for both options. Suppose you decide the business needs a machine worth $2,000 (we’ll ignore GST). You can either buy the machine outright or lease it (rent).

Option One
If you rent, the machine will cost you around $100 per month, or $1,200 for the year. This can be added to your business expenses.

Option Two