Acquiring New Equipment: Purchase or Lease?
You may need new equipment to take advantage of new business opportunities. Follow these guidelines to determine the best way to acquire it.
An old business adage states, "If it depreciates, lease it; if it appreciates, buy it." However, the reality is not so stark. On the one hand, interest rates are low, which makes taking out loans attractive and establishing lines of credit prudent. On the other hand, leasing can provide significant tax benefits and may make strategic sense if you are looking to maintain cash reserves.
Here's a look at four factors to consider when making the buy-vs.-lease decision.
1. Initial costs
When you purchase equipment through a loan, you can adjust your monthly payments by putting more or less money down. A lease agreement typically requires no down payment, says Kathleen McGurk, director of program management at De Lage Landen Financial Services Inc., a Wayne, Penn., company that offers equipment leasing services to Union Bank's small and midsize customers.
De Lage Landen can also add a portion of certain soft costs such as shipping, installation, and training into the lease plan, so you forego outlaying cash up front. The most popular lease payment schedule is a fixed monthly payment plan.
2. Equipment needed
What is the life expectancy of the equipment you need? If it's equipment with a short life expectancy because technology is still progressing rapidly, such as computers, leasing allows you to return the equipment at the end of the leasing period and upgrade to newer models. However, if you need heavy construction equipment, such as a bulldozer, it should still have years of use after you have finished paying off a multi-year loan. Leasing is also an option for equipment with a long useful life. For companies that want to "own" equipment, a loan is the best solution. With leasing, companies pay for the "use" of the equipment.
3. Budgetary and tax considerations
Loans and leases have different accounting and tax treatments. Generally, companies will depreciate equipment financed by loans and capital leases. With an operating lease structure, lease payments may be fully expensed. Whether you want to buy or lease will depend on your financial situation, how much cash you have available and what kind of equipment you will be acquiring. Of course, companies should consult with their own tax and accounting advisors in making the decision to borrow or lease.
4. Financial flexibility
Just as the depreciation/appreciation adage does not apply to all situations, a business has more options than lease or purchase. For instance, you can apply for a revolving line of credit that, once established, allows you to make asset purchases as needed, depending on your limit. This provides you with the flexibility of acquiring assets without going through the loan process. It also helps you respond quickly in the event you come across an exceptional offer.
At the same time, De Lage Landen offers flexible leasing programs, which may include an option to purchase or return the equipment, according to McGurk. With this option, you lease equipment for a certain amount of time and then either return it to the leasing company at the end of the lease or exercise your option to purchase the equipment. The choice is yours.
Whether you choose to purchase or lease or need the immediate access of a credit line or the flexibility of a lease return or purchase option, a key aspect to consider in your decision-making process is simple: How much financial flexibility do you need during the term of the agreement? In economic times like these, that kind of agility is extremely valuable.
For more information about an equipment lease, loan, or line of credit, visit www.unionbank.com/loans. Or, contact a Union Bank banker to discuss which option is best for your business.
Equipment leasing is provided by De Lage Landen Financial Services, Inc. Union Bank and De Lage Landen are separate legal entities, which are not affiliated with each other in any way by common ownership, management, control, or otherwise. Union Bank makes no representations or warranties as to the suitability, accuracy, completeness or timeliness of the information provided by third parties. De Lage Landen's Lease financing subject to lessee credit, collateral, and vendor approval. This is not a commitment to lend. Restrictions may apply. De Lage Landen does not provide tax or accounting advice. Applicants should consult their own legal and tax advisors.
Financing subject to credit and collateral approval. Other restrictions apply. Financing available to businesses located in CA, OR, or WA. Terms and conditions subject to change.
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