It’s probably a question you’ve asked and answered a million times now. And yet, you’re probably still wondering what the right answer is.
Should you be leasing or buying your materials? Which items should be leased? Which should be purchased outright?
It’s an important question for any Procurement professional. According to the report produced for ProcureCon Asia, entitled “Challenges in Asia-Pacific Procurement”, 41% of Procurement professionals lease between 50% to 75% of their transactions.
There are advantages and disadvantages to both approaches. The key is the find the best approach for each Procurement transaction. In some cases, it may be appropriate to lease an item. In others, purchasing may be the more effective way to go.
In this post, you will find out how to determine whether to lease or by on a particular transaction.
There are several benefits of leasing a piece of equipment rather than buying it.
Less Up-Front Cost
This is one of the main benefits of leasing. When you lease a piece of equipment, there typically isn’t a down payment. This means there won’t be a huge impact on your cash flow.
When you lease a piece of equipment, you can usually get better terms than you would if you had obtained a loan.
Another benefit of leasing is that you can upgrade your equipment much easier. This is especially important when it comes to certain types of technological equipment. Instead of having to buy a brand new version of the equipment, you can just upgrade automatically to the most updated version.
Leasing can make it easier to maintain your equipment. If something breaks, your company isn’t responsible for fixing it. The leasing company will either fix or replace the equipment. This can save your company time and money.
Leasing can also bring tax advantages. In most cases, your company will be able to deduct the amount it is spending on your monthly payments.
Leasing can make it easier to keep up with your competition. Some companies can easily afford to purchase the highest-end equipment.
Leasing makes it easier for companies who can’t afford to spend that much money on a high-quality product. If your company isn’t able to afford a large purchase, leasing could make it easier to operate at the same level of companies that can.
Leasing adds to the price of the item. Leasing can save you money on the up-front costs, but in the long run, it will be more expensive.
The Lease Agreement
When you lease an item, you are locked into the agreement.You will be obligated to make your payments during the course of the lease even if you are no longer using the equipment.
Any time you lease a piece of equipment, you are running the risk of paying for a leasing term even when you don’t need the equipment anymore. If you want to terminate the lease, there will most likely be hefty termination fees.
Less Control Over Maintenance
While you are not responsible for repairing damaged equipment, you are still at the mercy of the leasing company. They are the ones who will determine when and how the equipment will be repaired. In some cases, this could make things harder for your company.
Also, there’s the possibility that the company could be out of stock on the item you are leasing. That would mean that you may have to settle for a lesser-quality type of equipment.
When you purchase a piece of equipment outright, your company gains compete ownership of it without having to wait until your lease is paid. This is especially helpful if the item has a long life, and doesn’t need to be updated frequently. Also, if you need to, you can sell that piece of equipment as well when you’re ready to move on.
In some cases, there may be tax advantages to purchasing equipment. Depending on what you’re buying, you might be able to take the section 179 depreciation deduction. This could save your company quite a bit of money.
Simply put, buying is simply easier than leasing. When you need to obtain a piece of equipment, you just go out and buy it. No complicated contracts. No paperwork. No fuss.
Control Over Maintenance
When you buy, you are responsible for all repairs. While this can seem like a disadvantage, it can also be a positive thing. When you own the equipment, you don’t have to wait on any leasing company to make the repairs. Additionally, you don’t have to worry about having to use a lower-quality piece of equipment because the leasing company is out of stock. You have more control over your maintenance.
Higher Up-Front Costs
When you make a purchase, you’re spending a lot more money up front. Depending on your budget, this could mean that you are unable to buy the equipment you actually want. Purchasing could mean that you have to settle for a lower-quality product that is less expensive.
When you decide to buy equipment, upgrading can be problematic. If you’re dealing with a type of product that becomes outdated quickly, your company could end up spending more money.
Making the Decision
So, now that you know the pros and cons of both buying and leasing, you will need to figure out which approach is best for your company. There are a few factors you should consider when you’re deciding whether to lease or buy a particular piece of equipment.
- What tax breaks can my company take advantage of?
- How soon will the equipment become outdated?
- How long do we plan to keep the product?
- What is the resale value of the equipment?
- How complex is the lease agreement for this product?
Of course, there could be plenty of other factors that your company might consider.
The decision whether to buy or lease is one that vexes many Procurement professionals. Fortunately, there are ways to determine how to obtain the equipment you need in a way that benefits your organization. The tips in this article will make it easier to assess each transaction and determine which approach is most appropriate.