Lease or Purchase Capital Equipment

Lease or Purchase Capital Equipment?

Nov 26, 2012
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Major Factors to Take into Consideration Before Making a Decision

The pressure to reduce operating costs has made more stringent reviews of capital equipment acquisitions imperative. Given this, many companies struggle over whether to buy or lease capital equipment. While purchasing has been the traditional method of acquiring equipment, leasing often can be more cost-effective. Careful consideration of the alternatives can help you arrive at the most cost effective decision and lead to the best use of the company’s resources to meet its financial goals.

Analysis of major capital equipment acquisitions needs to go beyond a simple return on investment (ROI) and consider other factors, including the estimated technological life of the equipment and the company’s financial position.

Significant factors to consider when choosing to lease or buy equipment are:
  • Acquisition Cost – Instead of a large up front investment when purchasing equipment, leasing minimizes it. Another way of asking that question is: “Do I have enough extra capital to spend today for something that will make me money (pay back) in months and years to come?”
  • Equipment Value – There is little financial benefit for leasing, when acquiring equipment under $5,000, due to fees and higher rates for lower dollar lease amounts.
  • Technological Life of the Equipment – The equipment’s useful technological life should be considered in light of the company’s long-term goals. Equipment that is projected to become obsolete over an anticipated period of use is a good candidate for leasing. A properly structured lease allows the user to shift the risks of technological obsolescence to the lessor and acquire new technology at the end of the lease term.
  • Credit Lines – Leasing provides an easy, affordable method of using equipment that allows a monthly payment without obtaining a bank loan or worrying about budget justification. Leasing also keeps your other lines of credit open and total system financing, including delivery and installation, can be spread over the lease term.

Overall, there are several lease versus purchase models that companies can use to determine the best method of procuring capital equipment. By analyzing the alternatives, companies can make informed decisions on the best use of their resources to accomplish their goals.