In our last post, we looked at the pros and cons of buying and leasing real estate. Small business owners have a similar decision to make when it comes to other assets that support business growth, like vehicles, equipment, and technology. Again, each option has its advantages and disadvantages – and there’s no one-size-fits-all solution. Consider these five factors to help you decide whether leasing or buying is best for your firm’s next big acquisition.
1. Duration of Use
Durable goods like heavy machinery, furnishings, and vehicles may serve your business for many years, which can make them good candidates for purchase. Other acquisitions may provide utility only for a particular season or project. For big-ticket items that you will use only briefly, a lease is likely better. If you think the asset may continue to offer value, consider asking the lessor if a buyout option is available at the end of the lease.
2. Changing Technology
How quickly assets become obsolete depends a lot on your industry. While construction equipment or a fleet of commercial vehicles might meet a firm’s needs for a long period of time, highly specialized equipment and technology in a quickly changing sector is more liable to become outdated within a few years. This especially applies to IT, high-tech manufacturing, and research. If staying competitive in your field means upgrading to the latest technology every two or three years, leasing is often best if and when it’s an option.
3. New Versus Preowned
For items that have a longer shelf life, buying a preowned version may offer big savings. Choosing a used vehicle or piece of equipment can help you avoid dipping too far into your cash reserve, or it can allow you to secure a more manageable loan than a brand-new item would require. If having cutting-edge technology is important in your industry, the assets you need may be only available new, likely making a lease more cost-effective.
4. Financing Options
Certain assets may be prohibitively expensive to buy outright. Even if you choose to finance the purchase, you could still face significant upfront costs, though in some cases the long-term value of your purchase will justify the initial cash outlay. Leasing is generally less expensive in the near term, but for certain goods, leasing may eventually become more expensive than buying and financing. Your choice will depend upon the leasing and financing options available to you, as well as your firm’s liquidity and cash flow.
5. Tax Benefits
Tangible business assets can also provide opportunities for tax benefits. Your decision to buy or lease can impact the tax treatment of those expenses. For instance, the full amount of a lease payment is generally deductible during the year it’s paid, but if you take out a loan for an item you may only be able to deduct interest payments and depreciation. Check with your accountant or tax adviser to better understand how choosing to lease or buy would impact your business taxes and your overall financial position.
Making It Happen
As you’re strategizing about your next big investment, consider Nu Direction. Our small business loans are credit union-funded, allowing for a lowest-APR product with no application fees, no yield maintenance, and no prepayment penalty. Looking for other types of loans, like commercial real estate, residential investment real estate, or SBA loans? Contact us and we’ll be happy to connect you with one of our credit union partners.
The information contained herein is for general informational purposes only and does not constitute tax, legal, or business advice.
Brought to you by Nu Direction Lending, a digital-first business lender that was formed and is funded by credit unions. To learn more about term loans for your business, visit nudirectionlending.com or contact us by email at firstname.lastname@example.org or by phone at 866-354-7151.
Nu Direction Lending is a digital-first business lender that was formed and is funded by credit unions. We combine the speed and convenience of online lenders with the personalized touch of the local credit unions who help fuel our local economies.