Buy vs Lease dilemma is faced by most of the entrepreneurs. The decision on whether to buy or lease is dependent on number of factors such as duration for which such an asset would be required, the returns that the business will generate on the asset, type of asset and related technological developments etc. This difference is especially important when businesses look at capital intensive assets such as property, machinery, land etc.
Buy Vs. Lease an Asset
Table of Contents
- Purchasing (Buying): Purchasing requires more capital (cash reserve or lender support) as you look to purchase the asset by paying its full value.
- Leasing: Initial capital requirement under leasing contracts is limited and monthly payments also account to a smaller amount.
- Purchasing (Buying): When you buy equipment, you are the ultimate owner and are responsible for its maintenance etc.
- Leasing: Under leasing, the lessee is not the owner of the asset. He just obtains the right to use the asset for a fixed term under pre-defined lease payments.
- Purchasing (Buying): Buying decision is not related to the term of the asset as the owner can use it till the end of its useful life. An asset that is bought can be replaced at any time.
- Leasing: Leasing agreements are run usually for a fixed term and at the end of the term, the lessee is required to either purchase the asset or to return it to lessor. Most of lease contracts cannot be terminated before the end of the term.
Risk & Rewards
- Purchasing (Buying): Given that the ownership lies with the purchaser, the buyer is responsible for all risks and rewards associated with the asset. Hence, buying an asset should be avoided in an industry or segment where there are frequent technological innovations.
- Leasing: Under operating lease, all the rewards associated with the asset remain with the lessor whereas most of the risks and rewards stay with the lessee under finance lease.
- Purchasing (Buying): Purchasing an asset will bring you limited tax benefit. If the asset is funded using existing cash reserves, there is likely no tax benefit at all. For a debt funded asset purchase, the owner will be able to claim tax benefit on interest on such debt. Principal amount is not deductible though.
- Leasing: Under a lease contract, all the lease payments are fully tax deductible. This will include any lease rental payment plus the interest on any outstanding lease amount. Thus from a taxation perspective, leasing is much more beneficial
There can be more factors which are important while considering a decision like buy vs lease. These factors could be different for different situations, circumstances etc. It is ideal to take all other factors into consideration before taking decisions. You can share the factors in comments below which you think are important and not considered here.1