10 Reasons Why You Shouldn’t Lease Equipment

When it comes time to replace or upgrade your equipment, you’ll quickly notice that there are a lot of companies willing to finance your assets with equipment leases. These companies often provide a very useful service, particularly for businesses that need to spread their costs out over time.

However, this post isn’t about the benefits of signing a lease. Leases can be dangerous territory, and there are many reasons you should specifically give equipment leases a wide berth. In this post, we’ll look at ten reasons why you should reconsider leasing new equipment.

10 Reasons Why You Shouldn’t Lease Equipment

Before signing a lease, you should understand the risks and drawbacks of making this commitments. Here’s why you shouldn’t lease equipment.

Leases Are More Expensive

Let’s get the obvious out of the way first. It’s cheaper to just pay the ticket price for a piece of equipment than to spread that cost out over a couple years (with interest). If buying the equipment outright is within your budget, we recommend doing so.

Leases Aren’t Simple

There’s something to be said for simplicity. The more “moving parts” in your life, the more areas there are for problems to develop.

While there’s no reason to assume something will go wrong, having additional payments to keep track of — and making sure that the terms of your lease are, in practice, what you agreed to on paper — can open windows for unforeseen problems to enter.

The Laws Governing Operating Leases Have Changed

Leases fall into two broad categories: capital leases and operating leases.

Capital leases are mainly designed to facilitate ownership. Operating leases, however, function more like rental agreements with an option to buy at the end of the lease. These leases come with a few advantages like lower monthly payments and the ability to write off your monthly lease payments as a rental expense.

In December 2018, the Financial Accounting Standards Board officially tightened the criteria for what qualifies as an operating lease. Under this rule change, companies are required to recognize assets and liabilities for operating leases with terms longer than 12 months.

If you’re thinking of getting an operating lease for tax purposes, consult a CPA first to make sure you understand how this affects you.

You May Be Fully Responsible For the Equipment Before the Lease Is Over

Another advantage offered by traditional leases in the past was that fixing reasonable wear and tear was often the job of the lessor rather than the lessee. Such arrangements are less common now, and the responsibilities of ownership are typically signed over to the lessee.

Capital leases, many of which are more or less designed to take the place of a loan, are more likely to function this way.

An Equipment Loan Might Be a Better Deal

Equipment leasing is as popular as it is for good reasons, but if you have the time, credit, and enough money to cover a down payment (usually around 20 percent of the cost), there’s a good chance you’ll be able to get better rates with a loan.

Keep in mind, however, that loans don’t necessarily cover “soft costs” associated with the purchase, whereas leases sometimes do.

You Might Develop a Renter’s Mindset

We live in a time of subscription payments. Everything from your entertainment to your groceries to your shaving needs can be put purchased as a subscription service.

These monthly extractions of wealth work out extremely well for the businesses providing them, but aren’t necessarily the best thing for you as a consumer. Small, broken-up expenses can be easy to ignore, but they add up quickly over time.

It’s worth taking a look at the recurring expenses in your life and asking if you need more of them.

You Might Not Be Ready To Handle the Financial Implications

If you didn’t already have an accountant going over your books, you might need one if you take on a lease. Figuring out what you can and can’t deduct from your taxes, as well as getting an accurate read on your return on investment (ROI), may require more math than you’re comfortable doing on your own.

Selling Early Could Cause Issues

When you buy a product, even with a loan, you usually have the ability to sell it if you can’t manage the payments or decide you don’t want it anymore. But as binding contracts, leases can be a bit more like straightjackets when it comes to disposing of burdensome assets.

Be sure to understand to what degree you are considered the “owner” of the equipment you’re leasing and if there are any escape clauses in your lease should you run into problems down the road.

Late Fees Can Add Unforeseen Costs

You might be a diligent person who pays all your bills on time, but what if your business has an unusually bad month or a large one-time expense?

Many lessors charge significant late fees for missing a payment date. If you aren’t relatively certain you’ll be able to make every monthly payment on time, you may want to reconsider leasing.

Peace of Mind

Granted, your mileage may vary, but there’s something to be said about not having to worry about all the issues described above (and then some). While writing a big check to buy equipment may be painful in the short run, the stress and ramifications of that decision will probably be shorter-lived than if you lease.

The Bottom Line On Leasing Equipment

In some cases, leasing equipment may be the best option for your business. However, many businesses will find that other options are a more suitable fit. Equipment financing is a great way to get the equipment you need without paying the full balance upfront.

You may also want to look at other loan options, such as SBA loans, which offer long repayment terms and low interest rates.

Whatever route you choose, make sure to do your research, compare your options, and crunch the numbers to find the option that’s most affordable for your business.