If you own a business, you understand the amount of machinery, from production equipment to computer systems, that it takes to operate. However, you probably know that these assets aren’t cheap. If you have a new business, need to replace old assets, or want to expand, you have probably researched all the available options, but have you researched your financial options? These are the advantages and disadvantages of equipment leasing.

Disadvantages

Before you sign a lease, you should know about the disadvantages of this kind of contract. First, if you don’t have established business credit, you may have difficulty being approved for a lease. This is similar to the challenges you may face in gaining financing to purchase equipment, however.

If you are approved, your interest rate or initial outlay may be higher. In addition, the average interest rate for most leases is five percent, even if you have a strong credit history. However, if you can’t purchase the equipment in cash and have to finance it, you will still have to pay interest.

The most notable disadvantage is that you will never own leased equipment unless you decide to purchase it after your lease ends. Therefore, you may be limited on the use of and modifications you make to the equipment. In addition, you will lose the tax deductions or credits you may be eligible for if you had purchased the machinery. Finally, you cannot add this equipment to your books as an asset, so it will not help you when you seek future financing.

Advantages

Leased equipment typically has lower initial outlay costs. You also have the ability to schedule your payments on your schedule. For example, you could pay weekly, monthly, seasonally or yearly. In addition, your overall costs should be lower than purchased equipment. Maintenance is also often included.

Equipment leasing offers you great opportunities to test equipment. You can try out different brands of equipment. In addition, if you only need an asset for a specified period of time, for a specific, low-production product, you may sign a shorter lease. This is especially beneficial for short-term projects and seasonal sales increases.  

When your lease is over, you can upgrade your equipment and sign another lease, so you will typically have the most updated machinery in the industry. You also don’t have to concern yourself with selling old equipment. The lessor will deliver it and set it up and have it picked up when your lease ends.

If you need machinery for your startup or a growth period, research all the advantages and disadvantages of equipment leasing.