This question still comes up regularly. Should we lease or buy the equipment we will need next year? About half the time the questioner is actually asking which method is least costly. So here’s the answer.
The answer will ALWAYS be: Leasing is more expensive. The leasing company is buying the asset you want, usually 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 probably need help in negotiating a better purchase price.
So why lease at all?
The answer will ALWAYS be one of these:
- To conserve cash, either because you couldn’t get a loan or couldn’t come up with the cash required for a down payment on a loan. Expect a very high lease payment because the lessor probably sees this as a high risk transaction.
- To get credit from a new source without impacting your normal bank credit lines (which you’ll need later), or when your bank credit lines are tapped out and you still need more. Watch out for violating your regular bank loan covenants.
- To conserve cash, but this time because your high business growth rate is consuming large amounts of cash to build inventory, finance receivables, etc. In this case the extra cost might be worth it if margins are high enough.
- To sell tax benefits you can’t use but someone else can. Still raises the cost over an outright purchase, but often looks prettier at first blush.
The answer will NEVER be to save money.
This doesn’t make leasing good or bad, just more expensive than buying outright. Might there still be good reasons to lease? Of course, as we’ve hinted at in our bullet list above. But given the level of interest rates these days, you’ll want to take a hard look at leasing vs. buying to avoid making a financial mistake you’ll be paying for years down the road.
If this isn’t perfectly clear, please call us. We’d like to help.