The fundamental difference between buying or leasing equipment is with buying the equipment, the firm owns the asset until it is sold or recycled. Leasing allows the firm to have access to the equipment for the life of the lease, and then it is returned to the company it was leased from––unless the firm is offered the option of purchasing the equipment at the end of the lease. Many firms prefer to lease equipment because it helps control cash flow since many lease payments are lower than purchase payments. It really is no different than leasing a car; you have a low monthly payment and walk away from the car in two or three years and get into a new one. But there are benefits to ownership as well. Let us dive deeper into both options.
Leasing is like renting. The firm does not own the equipment and there are restrictions and conditions on how the firm can use it. The principal difference between the two is that leasing is for equipment, buildings/, and property; renting is for property only. Lease agreements vary; some agreements cover all repairs during the time the equipment is leased. Others may not cover certain repairs, but the lease can include specific coverage as an add-on at an additional cost, which increases the lease’s monthly payment. Accordingly, the firm should understand what is covered before signing any lease.
There are two common scenarios when it comes to leasing equipment.
Not Enough Cash to Purchase Equipment
When a law firm does not have the cash for a down payment on equipment––much less the full purchase amount––leasing the equipment is a great option. Some leases may require a down payment, but it will be much lower than that of a purchase loan. Also, monthly payments on a lease are much lower. The trade-off is that leasing usually has a higher interest rate, and the firm will pay more in financing/interest for the benefit of producing less cash. Leases are unsecured, and this can be great for a start-up that does not have many assets.
Equipment Becomes Obsolete
Law firms often find that equipment becomes outdated quickly. Periodic equipment upgrades are released that significantly drop the value of previous models. If the firm is considering equipment that falls into either of these categories, leasing makes more sense than purchasing. This way, the firm is not left with equipment that has significantly depreciated in value within just a few years.
Alternatively, if the firm wants the latest and greatest equipment, just like a new car, short-term leases certainly fit that bill. Going in and out of a lease every few years will be costly to the firm. But, if the latest equipment is necessary, it is a better fiscal option than financing the equipment through a purchase loan.
At the end of the lease, there are a few options. The firm can purchase the equipment at market value or at a previously agreed upon value, start another lease with the latest equipment or the firm can return the item, ending the lease.
Advantages of Leasing
- Small-to-no down payment.
- Great for equipment that may become outdated within a few years.
- Lower monthly payments than an equivalent loan, which maintains cash flow for other long- and short-term firm goals.
- Can be quicker and easier to qualify for than a loan.
Disadvantages of Leasing
- Must adhere to lease terms.
- Add-on coverage can be expensive.
- Monthly payments will be lower, but eventually the firm will pay more for a lease, and then the firm does not have the asset to show for the expense.
- Leased equipment is not an asset.
- If halfway through the lease, the firm decides it no longer needs or wants the equipment, the firm will not be able to get out of the lease agreement and will either continue making monthly payments or pay a lump sum for the rest owed.
If the law firm purchases equipment, the financing agent uses the equipment being purchased as collateral for the loan. This means the firm does not have to secure the financing with any of its own assets and a down payment is usually required.
Depending on the firm’s revenue and creditworthiness, the interest on equipment financing can be competitive compared to a traditional loan. It will certainly be lower than an unsecured loan or a short-term loan.
Equipment financing should be used if the equipment is expected to retain value for several years. If upgrades to the equipment are rare and older equipment has a good resale value, equipment financing can be a better option than leasing. Law firms just need to do their homework when reviewing all the different financing options.
Benefits of Purchasing/Financing
- Equipment becomes an asset.
- As the loan is paid down, equity builds.
- Can depreciate up to one million dollars of assets under the finance agreement.
- Fewer conditions of use since the firm owns the asset.
- Once the equipment is paid off, the firm owns the equipment.
Disadvantages of Purchasing/Financing
- Larger down payment and monthly payments vs. that of a lease.
- If an equipment upgrade becomes available, the value of purchased equipment can drop significantly.
- Can be more difficult to qualify for than a lease.
The decision to lease or finance equipment is not strictly financial. It very much depends on the scenario under which the equipment will be used and the potential for the equipment to become outdated. Be sure to explore all options thoroughly before answering THE question.