This question still comes up regularly: Should we lease or buy the equipment we will need next year? Often this is simply a cash flow question. But about half the time the questioner is actually asking which method is least expensive. So here’s the answer(s).
#1 – The answer will virtually always be: Leasing is more expensive than buying. The leasing company is buying the asset you want, often from the same source you would, and then leasing it to you. Another layer of operating cost and profit (the leasing company’s) has been added to the transaction, and their buying power will almost never lower your cost below what you could have gotten it for directly. If a lease sounds less expensive, you should try to negotiate a better purchase price or loan.
So why lease at all?
#2 – The answer will always be one of these:
#3 – The answer will never be: to save money, because your interest rate will virtually always be higher. Why? Because your leasing company is borrowing from someone else, thus adding a layer of cost.
Does this make leasing good or bad? Neither. Does this mean leasing will reduce your profits? Not necessarily. If you are a growing company, thirsty for capital and with good profit margins, we will almost always recommend you at least consider leasing, even at higher cost. It preserves capital that may not otherwise be available, capital that can be used in your business to generate profits in excess of the added cost of leasing.
If this is not clear, or if you’re still not sure what is best for your company, please call us. We’d like to help you.
We are Your CFO for Rent.