In a business, it is important to use advanced equipment that can increase efficiency and productivity and help you stay ahead in a highly competitive market. Mechanization and automation have been a boon to small business owners worldwide in this respect. Moreover, sourcing heavy equipment is no longer a daunting financial task.
Buying equipment costs a lot of money initially, but it pays off over time by helping you perform business operations and generate revenue. Nevertheless, for a small business just getting on its feet, the big decision lies at the beginning of the setup phase – would it be wiser to buy or rent the equipment needed?
How To Determine Whether to Buy or Rent Equipment?
To make a calculated decision regarding this, ask yourself five questions:
- What is your current cash flow situation?
- Is your requirement temporary or permanent?
- Can you handle the maintenance, upkeep and upgradation?
- Are you comfortable with the tax implications?
- Is there a better alternative?
Let’s deal with them one at a time.
What Is Your Current Cash Flow Situation?
As much as you want to invest in the equipment, it all boils down to a simple question: Can you afford it at this stage?
If you have a surplus cash reserve and have enough liquidity to fund business operations for a few months, you could consider buying the equipment. Buying equipment outright has two main advantages over leasing: 1. You get complete ownership rights, and 2. You can make any alterations or customizations to the machine per your requirements. Having your own machine means you need not fight production deadlines before the lease runs out. Customization helps your brand stand out in a market of similar products. But buying equipment includes more than just equipment cost. It includes costs for permissions/licenses, transportation, taxes, inventory costs, etc.
On the other hand, leasing allows you to acquire the equipment at a much lower initial cost, which is a better option if you are a little tight on the money side. In most cases, you don’t even have to make a down payment for acquiring the machine. You can pay off the lease amount in instalments over a longer period of time. However, it also has two major disadvantages: 1. You must pay the entire lease amount even if you decide to use it for half the duration, and 2. It is more expensive than buying the equipment in the long term. And you have no ownership right either. However, if your finances are tight, leasing a machine is more feasible, especially for the short term. You can save up and buy one later when your business stabilizes.
Is Your Requirement Temporary or Permanent?
For how long do you need this equipment? Is it just a one-off thing, or does your business depend entirely on it?
Leasing makes more sense if you need the equipment to try out a new product or manufacture a limited stock. But if your business depends upon using the equipment, buying it is better. As mentioned above, leasing machinery in the long term is more expensive than buying it, even when lessors are open to negotiation. On the other hand, buying it would ensure full control over the production process and get you some money as resale value if you upgrade or sell.
Can You Handle the Maintenance and Upkeep of The Equipment?
Maintaining a machine is like looking after a baby. It needs constant checkups, repairs and maintenance and a trained operator (at times) to ensure it keeps running smoothly and doesn’t disrupt your business. For this, you need to make sure you have manpower that is trained to repair the machine if something goes wrong, more so if it’s a customized one. You also need spare parts, which can be difficult if the machine is imported. If you plan on buying the equipment, resolve the above points before proceeding with the deal.
In the case of leasing, it is the lessor’s responsibility to maintain, upkeep and even upgrade. The cost of this is included in the overall lease amount.
Once again, it all comes down to how frequently you need to use the equipment and how much wear and tear it needs.
Are You Comfortable with the Tax Implications?
Leasing and buying are accounted for differently. Lease payments can usually be deducted as business expenses in your tax return, reducing the net cost of your lease. You deduct what you pay and reduce your taxable income. However, buying equipment is a capital expense and is added to the balance sheet. The CRA has a Capital Cost Allowance (CCA) list that states the percentage of equipment cost you can deduct as depreciation every year from your business income and for how many years. You can defer the cost over the useful life of the equipment and claim a tax deduction over a period of time.
Is There a Better Alternative?
Understandably, you want the best for your business. So whether buying or leasing, the first option is buying brand-new equipment. But is it the only option available? There is no harm in considering used or second-hand equipment if you are a little short on money. They need not be a permanent solution – you can buy or lease a new one in future.
And you could also have a mix of old and new and buying and leasing! While you could invest in new heavy machinery (for ownership and other advantages), you can lease other smaller equipment to manage costs. A penny saved is a penny earned, and you could save a considerable amount by mixing up options.
While deciding between buying and leasing, you must determine the cost, tax implications, and expected return on assets. The financing cost can be a determinant as a high interest rate could increase the equipment cost to a level where it generates negative returns.
Contact Edelkoort Smethurst CPAs LLP in Burlington for Your Accounting Needs
It is better to crunch some numbers with a professional accountant as he/she could give you a clearer picture of your financial capacity and the feasible option. At Edelkoort Smethurst CPAs LLP, our experienced accountants can provide financial analysis to help you spend your money wisely. To learn more about how Edelkoort Smethurst CPAs LLP can provide you with the best accounting expertise, please contact us online by telephone at 905-517-2297.