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Pros and cons of leasing equipment rather than buying for small businesses

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As you are starting up a new small business, there are a lot of financial decisions to make.The amount of money that you have to work with will dictate how you will obtain the materials and equipment needed to run your business.While there are pros and cons to both leasing and buying materials, this article will focus mainly on the pros and cons of leasing.

Pros of leasing rather than buying

  • Can continuously upgrade without hassle of selling.When you lease a piece of equipment it is easier to upgrade equipment later on down the road.Leasing also allows small business owners to address problems of becoming outdated, by providing the option to upgrade when the term of the lease is up. If you use your lease to obtain pieces of equipment that may be outdated in a short period of time, leasing is a good idea because you pass the worry of being stuck with a piece of equipment that may be obsolete to the one who is responsible for the lease (the leaser). You don't have to worry about the depreciation of your equipment and can simply move onto something better when the lease term is over.
  • Less money up-front.One of the big advantages to leasing is that it requires less initial expense. Leasing equipment rarely requires that the small business owner pay a down payment, unlike buying. As you are starting your business you may simply not have the funds required to invest in a purchase.
  • Tax benefits. Your lease payments can usually be deducted as business expenses on your tax return.Deducting business expenses lowers the amount actually made by the business.By reducing the amount of income provided by the business there is less that you are required to pay taxes on.The net cost of your lease is reduced by the tax savings you experience by taking the business expense deduction.
  • Flexible terms ideal for bad credit or those with a need to negotiate. Leases offer flexible terms which may make obtaining the needed small business equipment easier for those with less than perfect credit.Leasing also provides the possibly of negotiating a longer payment plan to lower your monthly costs of operation.

Cons of leasing rather than buying

  • No ownership rights. By definition, when you choose to lease something, you forego any ownership rights.The owner of the equipment is the party that is holding the lease.You miss out on any equity that is being earned on the equipment.If you are leasing a piece of equipment that does not become obsolete quickly, you are losing out on a great investment opportunity by leasing.
  • You end up spending more over time. With a lease you pay a higher overall cost.Leasing an item is almost always more expensive than purchasing it.The cost of a leased piece of equipment is even greater if you have the option of paying for the equipment and avoiding interest fees.Over time you end up paying interest and never taking advantage of the ownership rights to re-sell the equipment.
  • You are obligated to the terms of the lease. When you agree to take out a lease you become obligated to pay the lease for entire term.Even if you no longer need or stop using the equipment, you are obligated to continue making your payments. While some offer the option for early lease termination, this option is often accompanied by termination fees.You are obligated to continue paying for that piece of equipment no matter what the market throws at you.

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