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Page 2 of 2 Say, for example, you want to a piece of equipment that would cost you $7,500 to purchase outright. A lease on that item would be based on a certain dollar amount per $1,000 of value. At $40 per month per $1,000 in value, that item would have a monthly payment of $300, and over the three years, you would pay $10,800. | Leasing Quick Tips •Check with your state or national association before signing an equipment lease. Many associations have agreements with leasing firms that may be able to save you some money. •Considering a lease for something under $10,000? One leasing company representative who asked not to be identified said it might actually be cheaper to put such a purchase on a credit card rather than signing a lease. Do the math to decide, but don’t overlook credit cards as an option to leasing. •There’s a quick online calculator that can help determine your total costs for buying or leasing at
www.finance.cch.com/sohoApplets/BuyvsLease.asp •Be aware of automatic renewal clauses in any lease. Some leases state that if you make even one payment beyond the term of the lease, it automatically renews for another term of one year or more. So if you don’t track when a lease is set to end and continue to send in a check each month, you may be putting yourself on the hook for even more months of payments. |
In addition to the higher cost, you have will have built up no ownership equity in the item. So unless the item becomes virtually worthless at the end of the least, the lack of ownership can be a significant disadvantage. Be sure to ask up front about what buy-out options are available at the end of the lease. And keep in mind that you are generally obligated to continue to make lease payments for the entire lease period even if you stop using the equipment. There are generally large early-termination fees to get out of a lease early. Purchasing often less expensive Buying a piece of equipment outright has some obvious advantages over leasing. First and foremost, purchasing gives you ownership of the item, which is particularly beneficial if the item should have a long, useful life, such as office furniture or a paint booth. There are tax advantages to purchasing as well. In recent years, Congress has expanded part of the tax code known as “Section 179,” which gives businesses the ability to immediately write off large amounts of equipment. For 2007, you can deduct $112,000 in qualifying equipment purchases. That amount is reduced only if you put into service more than $450,000 in equipment this year, although there are some types of equipment – most notably, vehicles – with more restrictive Section 179 rules. But if cash is in short supply, purchasing may not be the best option because of the initial outlay it requires. Even if you get a loan to make the purchase, you will often be expected to make a down payment, perhaps as high as 20 percent of the purchase price. And that loan could reduce your ability to obtain other lines of credit you may need prior to it being repaid. Crunch the numbers Business financial advisors say it is best to take all these factors – tax issues, overall costs, cash availability and the expected life of the equipment – into account when deciding whether to lease equipment or buy it outright. Shop owner Grieve, they say, has it right when he makes most equipment purchases outright, reserving leasing for times when cash is a problem and when tax advantages and the life expectancy of the item offset some of the higher costs of leasing. John Yoswick is a freelance writer based in Portland, Oregon, who has been writing about the automotive industry since 1988. He can be contacted by email at
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