At some point in your entrepreneurial journey, you’ll reach a stage where you find yourself no longer able to keep up with the workload. So you decide to hire some in house staff. This means securing office space and the various IT equipment needed to get things running.
A problem that many face is that procuring these items can get really expensive, especially if your business involves lots of computers, strong bandwidth, specialized software, and other IT-related items. Usually, you have two options — buy the equipment outright or lease them over a certain period. Now you’re probably wondering which one is better?
The truth is there’s no straight answer to this question. Both options have their unique pros and cons, plus there are a number of things to consider before making a decision. With that in mind, here’s a few key questions that you need to ask yourself before choosing whether to buy or lease IT equipment.
1. How much capital do I have to invest in IT equipment?
Smaller and newer businesses tend to favor leasing IT equipment since they usually don’t have a large enough budget to buy all the computers and software they need. More established businesses, on the other hand, can quickly recoup this expense over the next couple of monthly revenues.
Cash flow is a big deal and small businesses are not likely to shell out what little capital they have at the expense of other essential obligations like rent and staff wages. It’s true that leasing IT equipment can cost more in the long term, but it has a less debilitating effect on cash flow since the payments are spread out over the lease period.
That being said, if your business has enough capital to buy the necessary IT equipment outright, and you don’t plan on spending money on upgrades frequently, then buying might just be the best option.
2. What competitive advantages will I gain by having top quality IT equipment?
Leasing gives your business access to IT equipment that you would not normally be able to afford if buying outright was the only option. As leasing allows you to spread payments over a given period, you can use the leased IT equipment to bring in enough revenue to cover the lease premiums.
If your business revolves around technology, for instance – data science and analytics, this can be crucial to success. Additionally, with leasing, you have more freedom to upgrade your machinery as needed, since you’re cash-strapped from the IT equipment that you have purchased.
However, if your business’ IT needs revolve around emails, simple file sharing, and document storage; perhaps there’s hardly a need for regular updates, then it might be best to just buy and own your own equipment.
3. What is my overall IT strategy?
Your overall IT strategy should inform how you acquire IT equipment for your business. On one hand, you can quickly swap machines in and out if you lease them; on the other, nothing compares to the freedom of owning your own equipment and modifying or upgrading them as you see fit.
If your business comprises a lot of distinct roles, then it might be more ideal to own those specific machines and have the freedom to modify them as needed. Generally, you can’t even do this with leasing since you don’t own the equipment.
By first examining your IT strategy, you can decide if it makes more sense to own the equipment or whether utilizing the flexibility of leasing fits better with your current and long-term goals.
4. Do you have IT experts in your business?
Purchasing computers, printers, webcams, and other IT stuff means you are also responsible for their maintenance. Plus if they ever require troubleshooting or an upgrade, that’s on you too.
The good news is most of these purchases are covered by manufacturer warranties, so it’s not like you’re always paying. Still, it would be extremely beneficial to have team members who know their way around your IT equipment.
Whether it’s a quick hardware fix here or troubleshooting a faulty program there, having IT experts in your business to take care of the machines when necessary is a huge plus.
On the other hand, when leasing the IT equipment, it is the lessor who is usually responsible for the upkeep and troubleshooting. In fact, in most cases, the lease contract will stipulate that you are not allowed to tinker with the machines yourself.
If you don’t have dedicated IT leaders in your business, then leasing the equipment may be the better way to go. This way, you’re effectively outsourcing your IT needs so all you have to worry about it keeping up with the monthly premiums.
Operating Lease vs. Capital Lease
If you’re just starting out in business or perhaps there isn’t enough cash flow to fund your IT equipment purchase, then chances are you’ll opt to lease instead. Before you do, you should first understand what type of lease to go for — operating or capital?
Also known as true leases, operating leases are when you rent the equipment over an agreed period of time. You’ll keep making payments for as long as the contract is valid and return the machines upon expiry. You can then choose to renew or make a new arrangement with the leasing company.
With a capital lease, you have the option to acquire the equipment once the lease term is over. Often, you’ll have to make some additional payments, but once complete, the equipment is fully yours.
It’s important to understand these because these leases are not treated the same way for tax purposes. You don’t own the equipment in an operating lease, so the monthly lease payments are deducted as a regular business expense. However, there will be no depreciation deductions. With a capital lease, you treat the equipment as though you have purchased it and therefore qualifies for depreciation deductions for tax purposes.
The Bottom Line
Buying or leasing IT equipment both offer their fair share of unique benefits and drawbacks. Choosing the right financing option then depends on your answer to the questions listed, as well as how “hands-on” you want to be with the management and maintenance of the machinery.
Guest Post: About the Author
Sam Maley is the Marketing Manager at Bailey & Associates. He enjoys educating clients about how to get the most bang for their buck from business technology investments.