Lease or Buy?

When it comes to acquiring productive assets for your organization, you will often have a choice to either purchase the asset outright (with either cash or debt), or to lease or rent it. There are several factors to consider when deciding which way to go.

Speed of depreciation

If the asset holds its value, buying may be better because you’ll be able to recoup more of your purchase cost when you decide to replace it. An asset with low depreciation might have lower lease payments, though.

Customization

A landlord may not be willing to construct or modify a building to your specifications, which leaves buying or building as the best option. You may want the option to modify to your needs and tastes in the future; if you own it, there’s nobody to stop you.

Ability to maintain

If your expertise is not in maintaining the asset, leasing might be better because the lessor would be responsible for it in most cases. A common example is a photocopier. Most people don’t know how to fix them, and often require specialized knowledge to repair, so leasing a copier would make sense because the lessor (who presumably knows how to fix their copier) would be responsible to make repairs.

Financing availability

If there is a significant up-front cost to purchase the asset that you can’t presently afford, leasing might be the better option until you’re able to buy the asset outright or obtain debt financing.

Income tax

The entirety of a lease payment is deductible for tax purposes, while only the interest portion of a loan is deductible. Getting that full deduction might be especially important in the early phase of a company when saving cash is vital to survival.

As you can see, deciding where to purchase or lease an asset isn’t always a cut-and-dried process. There can be several competing factors to consider, and it may be difficult to figure out which of these factors should carry more weight.