Many young startups find equipment leasing to be an attractive option. It’s no wonder why, as this financial tool can make one-time purchases much easier. Still, particular drawbacks make this path unwise for some. Use the following to weigh the positives against the negatives and assess whether this style of purchase agreement makes sense for you and your business.
One of the best reasons for leasing is that it allows you to pay for equipment over time. This is especially important in your venture’s early days, when there may not be enough cash available to make an outright purchase. Bills typically come monthly, significantly lowering your immediate financial burden.
Additionally, leasing makes upgrades easier. When newer models with important features become available, replacements are a snap. Just make sure that the contract you’re signing allows for this.
Even better, leasing allows maximum flexibility. Perhaps your operational situation changes, and you no longer need a particular piece of machinery. With equipment leasing, you won’t be stuck with something forever. Under most circumstances, you’ll be able to get rid of what you no longer want the moment your lease ends.
Leasing means you do not own what you’re paying for. Therefore, you won’t be able to take advantage of the tax savings that normally come with equipment possession. Additionally, because you technically don’t own what you’re leasing, its presence will not add to your company’s hard value.
You’re also paying interest on an item that could eventually no longer be in your possession. On average, expect to pay 5% APR for the machinery you need. Additionally, you’ll be responsible for repairs and general maintenance. Ultimately, it may be less expensive to purchase a piece of equipment outright than to continually pay interest on a lease over a long period of time.
Finally, new business owners may have trouble qualifying for one of these leases. Surprisingly, this might be the case even if you have a solid financial track record. You may need to make significant concessions for the deal to get done. Worse, potential investors may view your lease as a liability and therefore refrain from backing your venture.
For many young operations, equipment leasing is the way to go. Still, there are good reasons why others should avoid making such deals. Research what works best for your business to decide whether one of these arrangements is right for you.