To buy or lease, that is the question

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Dear Professor Bruce: I am starting a business and have limited funds. At the onset, I need a van and some expensive office equipment. Should I lease or buy?Answer: According to Joseph Rosenberg, CPA, the decision to lease or buy has many variables. If the business owner has limited funds, then used equipment instead of new equipment should be considered. Also it is possible to defer the purchase or lease of some equipment until additional funds are available, and acquire or lease the more critical pieces of equipment at the present time.Leases can be structured in many ways.- Will you own the van or equipment at the end of the lease? Is there a bargain purchase option, where at the end of the lease term the business owner gets to acquire the equipment at a very favorable cost? - Investigate if the lease will be an open or close end lease.- Will the leasing agent replace equipment at the end of the lease with state of the art equipment? Is there a value to the equipment that can be traded in if the equipment is originally purchased then replaced with a lease?- Check the amount of the down payment that could reduce the monthly lease payments. What will be the effective interest rate implicit in the lease?Purchasing the van and equipment should be considered as well.- Do you have the sufficient funds to acquire the asset? Will the purchase be financed? If so, what is the interest rate on the purchase?- How much will be the down payment and how long will be the period to finance the equipment? - Compare the lease cost versus the finance cost if you purchase.- Is leasing better for tax purposes? If the business owner purchases the asset, the business may elect to write off the cost of the equipment in the first year, depending on limitations of taxable income and total equipment purchased during the year. An operating lease will result in a monthly charge for tax purposes and would be spread out over the life of the lease.- What if you needed to sell the assets or terminate the lease? What are the penalties for early termination and when do they occur? Is there a market for the equipment if you purchased it and it was in good condition? How easy would it be to find a willing buyer at a price you would accept?The lease versus buy decision is a very common experience for a business owner. Make sure you look at the pros and cons of each method before you make your final decision.For further information, please visit www.cpajoe.netBruce Freeman is president of ProLine Communications, a marketing and public relations firm in Livingston, NJ and an adjunct professor of marketing and entrepreneurship. E-mail questions to Bruce(at)SmallBusinessProf.com.