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Careful Consideration and Pulling the Trigger on a Lease vs. Buy Decision
by Jeff Brandenburg

“Should I lease the equipment or buy it outright?” is one of the questions just about everyone faces at some point in their life. Whether you are involved in agribusiness, manufacturing or looking to update your personal vehicle, this issue will need to be considered.

Given the wide array of choices, just what should you consider when evaluating whether to lease or buy? Here are a few of the essential considerations:

What is the useful life of the equipment?

There are two components of the useful life: First, how long do you plan to use it? Second, how long will it be before the item is obsolete from a technology point of view? In many cases, leasing may be the best option when the period of use will be short or evolving technology will make the equipment obsolete in a short period of time.

What are the service/repair requirements of the equipment?

Many lease agreements include servicing and repairs as part of the lease price. Although the lease alternative may seem to be more costly, the value of the servicing and repairs may make it more cost-effective in the long run.

What is the true cost of the lease?

The true cost can be affected by a number of factors, but if you have all of the information, calculations can be made to determine the most cost-effective approach. Most leases have an inherent interest rate built into the repayment schedule. You will need to compare that inherent rate with the cost of borrowing you would pay if you purchased the equipment outright. Consider if there is any guaranteed residual value at the end of the lease term. Also, how likely is it that the equipment will hold that value throughout the life of the lease? Finally there may be income tax considerations that would affect your decision. All of these factors should be considered in determining the true cost/value of leasing versus buying.

Is it a capital or operating lease?

If you have any sort of financial reporting (audit, review or compilation) for your organization, your accountant may ask if the lease is a capital or operating lease. If the lease terms meet certain requirements, your accountant is required to record the lease just as if you had purchased the equipment. If you have outside financial reporting requirements, it will be important to determine how the lease will be classified within your financial statements.

What are potential advantages of leasing?

In many cases leasing may require less up-front cash than purchasing and the monthly lease payment may be less than the loan payment required if the equipment was purchased. Leasing may also be advantageous where the equipment is only needed for a short period of time.

What are the potential advantages of buying?

Often equipment can be changed more easily when owned versus leased. Also, some leases have minimum terms or may be non-cancelable. In addition, owned equipment may be used as collateral on additional loans where leased assets may not be.

There are many items to consider in the lease versus buy decision-making process. We have touched on a few of the highlights here, but keep in mind that there are a great variety of items to consider when making your choice. The good news is that with a little effort you can gather all of the information needed to help you make the best decision given your particular circumstances. There are no “rules-of-thumb” that apply in all lease versus buy situations, but your decision can be made more easily with proper planning and effort.

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