Technology and markets are continually evolving, dividing industrial companies into three broad categories: innovators, followers, and status-quo. What determines which camp a business falls into is largely decided by who is at the helm; are they a risk-taker or conservative with the company’s resources? First we’ll distinguish leasing versus buying, then apply those differences to different business strategies.
Pros and Cons of Leasing Industrial Equipment
Industrial equipment leases provide immediate flexibility in terms, lower start-up expenses, and the ability to swiftly change or upgrade equipment without substantial out-of-pocket expense. Lenders have greater ability to adjust terms to meet the needs of the customer, so long as it remains equitable compared to the equipment’s depreciation. Equipment that becomes outdated quickly, with a lower residual value, will not have as much flexibility, yet still offers a lower (possibly even no money down) acquisition cost.
While a lower start-up cost and regular upgrades is appealing, it does come with certain disadvantages. The overall cost of use of the equipment will be higher than purchase, and at the end of the term the equipment will still be the asset of the lessor. This may not be a concern if the equipment in question is considered obsolete by the end of the term, as the business is not burdened with possession, sale, nor disposal of antiquated equipment. However, should the equipment have substantial resale value, the lessee possesses no equity in the equipment. Furthermore, most lease terms require lessees to make payments for the entire duration of the lease, even if the equipment is down for repair or is no longer in use.
When It’s Advantageous to Lease Instead Of Buy Industrial Equipment
Start-ups and businesses looking to stay on the cutting edge of their sector will often find it more beneficial to lease equipment rather than purchase, as it keeps more capital in the business and provides flexibility to upgrade and change equipment rapidly to adjust to market conditions and further innovate. The business receives the tax advantages of the finance expenses without the significant cash outlay at the front-end with a down payment.
Pros and Cons of Buying Industrial Equipment
The most obvious advantage of purchasing industrial equipment is ownership. Building in equity in equipment with a longer lifespan and retains value beyond the finance period provides many advantages, such as longer usage for the same purchase price, decreasing the operating cost over the lifespan of the equipment, a valuable asset which can be leveraged for secured loans, and a sellable asset to raise capital as equipment needs shift. Additionally, the depreciation of said equipment is tax-deductible with a Section 179 deduction.
As far as downsides are concerned, the two most common disadvantages are the high initial cost, either capital expense purchase outright or a substantial down payment when sourcing an industrial equipment loan, and the risk of being stuck with outdated equipment a handful of years down the road. Businesses without adequate cash reserves will find it challenging to allocate adequate resources to purchase outright or provide an ample down payment for a better rate or lower monthly payments. Similarly, some equipment may not be worth the residual value with rapid depreciation and obsolescence, leaving limited options on the table: continue to use outdated equipment and risk rising repair costs, reduced operating capacity/precision, or sell the equipment on the cheap and re-invest in new equipment.
When It’s Advantageous to Buy Instead of Lease Industrial Equipment
Purchasing industrial equipment can be more advantageous if a sizable reinvestment needs to be made for tax purposes, or in a stable or slow-to-evolve market where equipment advances are stagnant and holds it’s value. The short-term expense of acquisition will benefit the company down the road, as financing is paid off and the equipment becomes an asset that can be leveraged as collateral for future expenditures including new equipment loans and securing asset based lines of credit.