Should I rent, lease or purchase equipment for my business?

In August 7, 2017

Header image: Should I rent, lease or buy?Equipment is an expensive commitment for many businesses, and the decision to rent, buy or lease makes quite an impact on cash flow. They also have different levels of flexibility, tax deductions, maintenance and more.

So how do you decide which one is appropriate? This quick chart might help you decide.

Rent

  • Short-term contract, often by the hour, day or month
  • Ideal to try something before you buy it, or to fulfill a short-term business need
  • No down payment or balloon payments required
  • Contract does not require a lender, typically provided by the rental company
  • Perfect for start-ups or businesses with poor or no credit
  • Equipment can be frequently updated to avoid obsolescence
  • Costs may fluctuate between rental periods
  • Zero responsibility for maintenance and repairs
  • Damage can be very costly and cause lengthy delays
  • Insurance coverage can be expensive
  • Current-year tax deduction

Lease

  • Mid-length term, often ranging from six months to several years
  • Financing requires a lender or bank
  • Minimal down payment or cash up front
  • Interest rates are lower than renting, but higher than buying
  • Costs more than a purchase
  • Less paperwork than a conventional purchase loan
  • Funding is often obtained quickly with minimal restrictions
  • Can be difficult to break the lease if equipment is no longer needed
  • Accommodates frequent upgrades by matching use period to terms of the lease
  • Lessee is usually responsible for insurance and maintenance
  • Current-year tax deduction

Buy

  • Long-term contract
  • Often the most cost-effective option for equipment needed longer than three years
  • Longer payment terms can help cash flow by lowering monthly costs
  • Typically the lowest interest rate, but more paperwork and time to complete
  • May provide the best tax advantages over renting/leasing, ability to amortize
  • Enhances creditworthiness as a capital asset, and builds equity
  • Longer term payments increase risk of equipment becoming obsolete or losing value over time
  • Often requires a 10-30% down payment, and may have a balloon payment due
  • Owner is responsible for all maintenance, repairs and insurance
  • Once paid off, the asset fully belongs to you

For many businesses, the decision to buy can hinge on how long they need the equipment, and whether it becomes obsolete quickly or not. If they plan on using something for five years, for example, then a short-term rental would not be a good fit. They’d pay far more than a lease. Purchasing it might be preferred to a lease however, if the financing terms are affordable, since payments could be matched to the life expectancy. On the flip side, if they only need something for a few months, such as a tractor needed for harvesting produce or a crane for one specific construction project, a short-term rental might be perfect.

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Deciding whether to rent, lease or buy equipment can be complicated…. and with any complicated decision, it’s never a bad idea to seek experienced counsel to discuss your options.

If we can help, don’t hesitate to call. We’re here for you.