Buying vs. Leasing Considerations for Manufacturing Equipment
Whether you are an established manufacturer or just starting out in the industry, the decision to buy or lease needed equipment frequently comes into question. To decide which is right for your business, start with a cash flow analysis to estimate and budget the amount of cash you’ll need to cover the costs of both options and financing considerations. Once your budget is determined, consider the pros and cons below to help make your decision.
- In the short term, leasing conserves cash due to the lower initial upfront costs compared to purchasing
- Lease payments are often 100% tax deductible as an operational expense under Section 179
- Predictable monthly payments allow you to budget accordingly for upcoming years
- No equity, return on investment, or ending cash flow at expiration of the equipment’s lease
- Product selection could be of lower quality due to limited availability of equipment for leasing
- Lease payments include interest so overtime, costs are greater than an up-front equipment purchase
- Long-term savings due to not paying a premium on leased equipment
- Opportunity for additional cash flow from selling the equipment at the end of use
- Ownership and application of the equipment on your own terms
- Section 179 of IRS Tax Code allow for larger first year deductions
- Requires a higher initial upfront capital cost as opposed to lower monthly lease payments
- As the owner, you are responsible for all maintenance and repair costs
- If technology becomes outdated quickly, you have to decide whether to continue use with outdated technology, update the technology, or sell the equipment at a potentially lower value
Consider the New Lease Accounting Standards
For companies reporting under an accrual basis of accounting, the new leasing accounting standards also may affect your decision. The standard becomes effective for fiscal years beginning after December 15, 2019 and requires all leased assets to be reported on the balance sheet as an asset and related liability which can affect any debt covenants with other financing arrangements the company has.
If you have questions about buying versus leasing or how the new lease accounting standards will affect you, contact an Anders advisor.