What is the actual cost of ownership if you choose to lease instead of buy? The best option will depend on the company asking the question. You should consider the following before making your decision.
Buying equipment upfront is expensive and requires maintenance. The minute you invest in a new machine, it’s only a matter of time before a new version comes out – and makes yours outdated or irrelevant. Is this the reality your company is facing?
Or does your company know how the equipment will be used in the coming years? Does your company have strong liquidity and no significant plans for growth? Does the equipment frequently need to be adapted or updated?
How you answer these questions will determine whether leasing or buying is the most sensible route for your company. We have compiled a list of considerations that you should weigh up before making your decision, as well as the pros and cons of leasing versus buying in general.
Buying versus leasing
While many businesses benefit from leasing equipment, a direct purchase can sometimes be more cost-effective. When comparing buying and leasing, you should evaluate the following factors:
● Purchase price
● Amount to be financed
● Annual depreciation
● Tax and inflation
● Monthly leasing costs
● Use of equipment
● Ownership and maintenance costs
Advantages of leasing
Leasing is ideal for equipment that needs to be upgraded regularly, such as mobile phones and laptops. Leasing buys you the freedom to get the latest equipment more easily. A low and predictable monthly leasing cost is particularly advantageous for growth companies.
If you need to upgrade to more advanced equipment in order to handle larger volumes, you can do this more easily with a lease – without having to sell existing machines and buy new equipment.
For short-term use, leasing is almost always more cost-effective. You should also consider growth: If your company is expanding and developing rapidly, a lease will be preferable to a purchase.
Many lease agreements include service contracts and other ancillary services that provide peace of mind for the company and reduce the need for in-house technicians.
Disadvantages of leasing
Nothing is free. In most cases, leasing will involve a higher interest cost. Leasing will sometimes be more expensive than buying the equipment directly, especially if you end up buying the equipment when the lease expires.
While some companies value having leased equipment serviced by others on a regular basis – which also requires fewer in-house resources – compulsory maintenance can become unnecessarily expensive over time. This can be a hidden cost that becomes very evident in the accounts.
Advantages of buying
If you will be using the equipment for three years or more, buying it via a bank loan can be preferable to a lease agreement. When your company owns its own manufacturing equipment, you can adapt it to suit your exact requirements at any time. This is not always possible with lease agreements.
Buying also enables you to resolve issues quicker, because you don’t need the leasing company’s approval to organise a repair or order a replacement part. Additionally, you can sell the equipment when it’s no longer needed.
Disadvantages of buying
The biggest disadvantage has to do with the equipment becoming outdated. Once you have purchased something, the risks are higher when the equipment becomes outdated. The costs of maintaining and repairing machines, in addition to a considerable initial outlay, can pose a financial burden for many companies – especially during a period of growth.