Small Business Equipment: Lease or Buy?
Investing in equipment for your small business is one of the costs of doing business – no matter what industry you’re in, the right equipment can make you more productive, save money and deliver service to customers better than before. But many business owners struggle to decide whether it makes the most sense to rent or purchase their business equipment. There can be some tax advantages to buying business equipment instead of renting or leasing, but the overall cost of ownership can sometimes be more than the equipment is worth. This makes it a complex calculation when trying to decide whether you should rent or buy equipment for your business, and it varies depending on the industry and the type of equipment you need.
We talked with a few experts to get some advice on when you should rent or buy equipment for your small business.
Lessons from a Party Rental Company
When asked whether it makes the most sense to rent or buy business equipment, Gabe Kuperman, marketing consultant and founder of Huge Impact, Inc., says, “They should do both. If the equipment is cheap enough to buy, and it will pay for itself in one year or less, then go ahead buy it! Otherwise, if equipment will take years to pay off, then perhaps you should rent it.”
Kuperman says that he relied on this simple rule of thumb when he used to own a party rental company, where he needed to have lots of equipment on hand to be able to rent it to customers. But even in a business based on owning and renting equipment, it sometimes made more sense for his company to rent than to buy.
“When I used to own a party rental company, if a customer needed a new table we didn’t have, but that we marketed, we would go ahead and buy it, if we could pay it off after renting it a few times,” Kuperman says. “On the other hand, if it was a much larger rental that would take 20 or more rentals to pay off, we would cross-rent the table from a competitor, so we could still service the client and make a small margin.”
Tax Benefits of Buying Business Equipment
Deducting depreciation for tax purposes can be confusing. Depreciation is a deduction for the basis or fair market value of a business’s assets – equipment, furniture, vehicles, buildings, etc.
Laura Canales, a Certified Public Accountant in Boise, Idaho, says that depreciation of business equipment can be taken as a tax deduction in the same year that the equipment was purchased, or during the useful life of the asset. “I recommend that business owners look at the net taxable income of the business, and see if that income can be reduced any further using depreciation,” Laura says. “There can often be significant tax savings from depreciating the entire cost of an asset in a particular year to reduce net taxable income as much as possible as long as the depreciation does not cause taxable income to go below $0.00. However, careful consideration should be given to future years as well. A business owner must think about whether any depreciation deduction would be more useful over time rather than in only one year, and if reducing net taxable income to near $0.00 is in the business’ best interest for future planning.”
An Easy Tool to Decide Whether to Lease or Buy
Laura also says that deciding whether to lease or buy business equipment depends on the total dollar amount of the lease or the purchase. She recommends a comprehensive cost comparison tool called Lease-vs-Buy.com that can help you figure out whether it’s in your best financial interest to rent or buy equipment. You might want to consult your accountant and work through the tool together if you don’t understand all of the definitions.
But keep in mind that when you own an asset, even if it is a depreciating asset like a company car, there still can be advantages to owning that equipment instead of renting.
“What happens at the end of the lease might be a bigger factor in the decision,” Laura says. “At the end of a lease, the asset might have to be turned back in, resulting in loss of use of that particular kind of asset or loss of time used to investigate its replacement. Or there might be a buyout, which is usually a large dollar amount, or additional fees if certain conditions were exceeded, such as mileage on a vehicle or number of pages on a copier. With a purchase, the asset can still be used, and also can be sold.”
Look at your Business Operations
Another factor to consider when deciding whether to rent or buy is: how does this piece of equipment fit into your overall business operations?
Al Ruggie, PR Director for 911 Restoration, a home restoration company that helps people rebuild and recover from disasters such as fires and floods, says that one of the big motivations when deciding whether to buy equipment for his business is the simple concept of frequency of use.
“Equipment purchases for our business, from the office copier to air movers and a TES (Thermal Energy Systems) drying trailer must be made with an eye to frequency of use,” Al says. “But some pieces of frequently used equipment make more sense to lease. For example, the copier gets used all day long by many departments, but we still lease it because leasing provides a better value. Copier technology is as fast paced as the rest of computer technology and to buy one would be like buying a desktop computer with the hope that you’ll be able to recoup the expense of it by reselling it in an era of tablets. It just won’t work. Plus with the copier we get free toner and free service on it should anything go wrong, and this gives us peace of mind that owning it cannot provide.”
911 Restoration needs specialized equipment to do big cleanups and repairs at customers’ homes and businesses, and because of this specialization, it often makes more sense to buy the equipment.
“We purchase air movers en masse due to the nature of our business,” Al says. “Our company is growing and there are always branches that are expanding or taking on bigger jobs, and air movers are expensive pieces of equipment that are not easy to just pick up at the drop of a hat. Plus by buying them in larger quantities we get a better deal that then turns into savings or profit when we employ them on restoration jobs.”
Another thing to consider for your business: can you afford to go without a certain piece of equipment? At 911 Restoration, they occasionally have situations where they need hard-to-find equipment that cannot be easily leased.
“For things like the TES air heating trailer, we have purchased this equipment. Not because we use it extremely frequently, but because in those rare situations where we need it, we do not want to lose a job because we don’t have it,” Al says. “So in that case, owning the equipment is like a technological business insurance policy. It just makes sense to have one.”
No matter what business or industry you’re in, hopefully these insights and examples will give you some helpful information about how to think about the eternal question of “rent vs. buy” when obtaining business equipment. Consider the tax implications, the upfront and ongoing costs, the benefits to your business of having the equipment on hand and the overall implications for your business operations.