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Leasing or Buying: Which is
Best for your Business?
Today, almost anything can be leased. Cars, computers, stereo equipment and
big screen televisions all come with an option to lease. Although the decision
to lease or buy isn't an easy one, when it concerns the purchase of equipment
for a business the stakes are even higher. Equipment is overhead – an
investment. Will leasing lower taxes? Will buying lower the payments? Which is
better for a growing business? These are some questions to address before
signing on the dotted line.
Every business varies which makes the decision to lease or buy an individual
one. A tax adviser or accountant can evaluate business strategies as well as
analyze critical information such as a cash-flow statement, operating statement
and balance sheet.
Option number one: leasing:
An appropriate time to lease is in an expansion year. While a high-profit year
favors buying, leasing offers flexibility and reduced risk when a business is in
a growth phase. The short-term nature of a lease doesn't lock a business into
one piece of equipment, which is advantageous when the business is growing.
Another advantage of leasing is its liquidity. The lease contract should be
structured with a purchase option at the conclusion of the contract that
accurately reflects the equipment's market value. This results in lower
up-front costs, lower payments and better cash flow. The contract also allows
the lessee to fix their payments and deduct them from their taxes. This can be
done when buying equipment as well.
Before signing a lease, the contract should be reviewed carefully. The most
important contract item is the length of the lease. Most leases are in the range
of two to five years, with three being the most common. Interest rates also need
to be considered. Rates can vary widely, making it essential to compare.
Insurance coverage is another important item to consider. Is the equipment
insured under the individual or the business? Finally, don't enter into a
lease that doesn't accurately reflect the value of the equipment. This can
result in the loss of tax advantages.
Option number two: Buying:
Obviously, the primary benefit of buying is ownership. When the term is up, the
equipment is owned free and clear, as opposed to signing a new contract and
continuing payments. As mentioned earlier, leasing offers some tax breaks, but
when purchasing equipment depreciation, insurance, repairs, taxes and interest
can be deducted. Tax issues aside, if ownership is the ultimate goal, buying is
the way to go because equipment will cost less in total when purchased up front,
rather than at the end of a contract.
Another problem that presents itself at the end of a leasing contract is
excess wear. Most leases limit wear to the equipment during the lease term.
Often, people would rather buy than pay extra charges for exceeding wear limits.
However, excessive wear does lower the equipment's resale value.
Unfortunately, the leasing versus buying debate doesn't have an easy
answer, but knowing the pros and cons of each will help in the decision-making
This article provided courtesy of THE FLOOD
COMPANY, serving the painting
industry for over 150 years.
They are manufacturers of high
quality wood finishing products, preservatives, paint additives and
For more information on their products and
informative articles, visit
their website at http://www.flood.com.
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