Should I buy or rent the equipment that my company needs? That is the question that every business owner faces at the beginning of his or her venture. Both options have their benefits as well as some downsides. That is why all aspects need to be considered carefully and only then should you make a decision about renting vs. buying equipment.
Such is the case with any company, and when it comes to smaller companies, this decision seems even more important since small firms often struggle with their cash flow.
In general, if there is a good chance of obsolescence and you plan to use the equipment for five years or less, renting is considered to be better for you.
However, it is not always as simple as that. Now, let us take a look at the pros and cons of the two options.
Benefits of renting equipment as a small company
Let us start with the biggest and the most obvious benefit of renting which is a less initial expense.
Since renting the equipment often does not require the down payment, it means that you can get the equipment you need for your business without breaking the bank.
Consequently, you will have more money left to spend on your business’s other requirements.
Another benefit of renting is that you will have more predictable monthly expenses since you know how much money to set aside for rent. Some finance hacks can help you learn more about the expenses.
If you decide to rent your equipment you will be able to have the latest technology. Computers and other technical equipment get outdated very quickly.
When you rent them, you do not have to worry about the obsolescence issue, but the renting company does.
Of course, they have that in mind when they calculate the renting cost that you will pay, but the bottom line is – when your equipment becomes outdated you can easily rent the newer, faster and cheaper devices.
When you rent equipment, you do not own it, so you can deduct the renting fee as a regular business expense.
For small companies, that can mean a lot. There is one more advantage worth to be mentioned at this point.
Renting enables you to use the expensive tech equipment that you might find unaffordable otherwise. This could be a good trick for cutting off expenses!
Downsides of renting
The first downside of renting the equipment is that you will pay more in the long run.
For instance, if you need 10,000 dollars to buy a piece of equipment, you will probably spend around 14,400 for three-year-rent. And at the end of that period, you would have to return the equipment.
One more negative aspect of renting is that you will have to continue paying until the end of your renting term even if you stop using the equipment before that.
For example, if your business changes or you decide that you need other equipment, you will still be obliged by the renting agreement.
That is why it is crucial that you set the right length of the renting term.
And, before you even sign the renting agreement you should find out if there are early termination fees or penalties. If so, calculate whether it’s worth the risk.
By now, you have probably realized that renting vs. buying is not an easily solved dilemma. If only the process were as simple as finding the professionals who can move your business facilities!
Advantages of buying
Buying equipment is so much easier than renting. That is if you can afford to buy it.
There is a lot of paperwork involved in renting and you need to be good at negotiating so that you don’t end up signing an unfavourable renting agreement.
So, if you have the cash, an outright purchase might be the best solution for your small company. It is also cheaper in the long run.
The good thing about buying a piece of equipment is that you are in control of it. The renters often set the specifications according to which you have to maintain the equipment.
However, when you are the owner, you get to decide how and where to service your devices. Besides, you can always sell or exchange them.
Tax incentives work in favor of buying too. The IRS code (section 179) allows you to deduct the full cost of newly purchased assets during the first year. Even though some assets do not qualify for the section, the tech equipment usually does.
Disadvantages of buying
While a purchase seems like a cheaper option in general, there are many risks to be aware of.
If we talk about IT equipment, for example, the small companies tend to update it every 18 months since that is the period after which it becomes outdated.
That means that you are stuck with old devices only a year and a half after you had purchased them.
The initial cost of acquiring any kind of equipment is a great burden to a small company’s budget.
Maybe the money would be better spent on advertising or some other field that would help your firm develop and grow.
To sum up – renting vs. buying equipment
Let’s compare the pros and cons of the two ways to get the necessary equipment for a small company:
- Price – Renting spreads the cost over a while, but buying is a more economical option in general; The price is often the determining factor in renting vs. buying. Maybe personal finance software may prove useful here.
- Taxes – When you rent you get a smaller amount of money back, and when you buy the figure is much higher;
- Outdatedness – Don’t worry about it if you are renting and be careful when buying;
- Maintenance – You are in control of the maintenance of the devices you bought while renting companies have their standards that you need to comply with;
- Termination – You can easily sell or trade the equipment if you see that you do not need it anymore. However, you will probably have to pay a termination fee to the renting company should you decide that you no longer need their services.
Weigh the pros and cons of buying and renting before you make a final decision.
There is no universal answer to the question of whether a small company should rent or buy its equipment. The company management should approach this issue rather seriously.
Only after a thorough analysis of the options, the decision should be made. A good piece of advice is to always consult your accountant or you can even hire a consulting company.
They will help you determine the cost-effectiveness and then you will be able to make the right choice for you.