If you’re an entrepreneur, you know well enough that starting up a business is very expensive. Aside from purchase or rent costs, you must also budget for equipment costs. Perhaps you need to purchase 2 delivery trucks or maybe you need 10 computer systems. Whatever your business needs, more than likely the equipment will set you back a good bit.
If you purchase 10 computers and now only have a need for 5 employees, what do you do with the remaining 5 computers? Do you pay to put them in storage? Maybe you just put them in a back room, taking up valuable space. Or, you could sell them and maybe get a little cash return.
As most businesses know, demand and usage for equipment often fluctuates. Although you needed 5 copy machines last month, you may find this month one will suffice. However, if you purchase all of your start up equipment, there is little you can do but store or sell when it is not needed.
If you are purchasing electronic equipment, you must also consider that constant updates make relatively new equipment outdated and old. A computer may last 5 years or until a new, faster edition is offered. If the equipment is being used heavily on a daily basis, chances are its life expectancy is greatly decreased. So, just when you’ve settled in and business is starting to pick up, all the computers begin to fail. You are left between the decision to repair or purchase new.
When you purchase a piece of equipment you either do so with cash that could have been used elsewhere or with a loan that ties up your credit. Once you get the loan paid off, chances are it is time to replace the equipment.
However, many small businesses are finding that leasing equipment is a more financially practical idea for them. You are set up on a monthly payment plan and at the end of the lease can purchase the product for a reduced price or simply update to the newest model. Having the flexibility to update outdated equipment every few years for newer, faster models is often the most attractive option for those who choose to lease.
If you are an entrepreneur deciding between leasing and purchasing, you must factor in a few things. First determine the length of time you plan to use the equipment. If you are going to keep a delivery truck 12 years, then it would probably be more cost effective to purchase. However, if it is a computer that will depreciate value very quickly and need updating within a few years, it may be more beneficial to lease.
You must also consider the cost of the item in question. Would it make much sense to lease a $30 coffee pot for several years? No. However, would it make sense to lease a $20,000 copy machine? Probably.
Another appeal of leasing is the ability to test the equipment. You may spend $40,000 on a piece of medical equipment and later find out that it doesn’t necessarily fit your practice. If you lease the equipment, chances are you can terminate the lease and choose another piece of equipment.
If you are considering leasing equipment, you will also want to read the fine print. Some common things to find definite answers to are:
* If the equipment needs a repair, who is responsible?
* If the equipment is damaged, who pays for the repair?
* Will a “loaner” be available during repairs?
* Is there an early termination fee, and, if so, what is it?
* Can the lease be terminated early?
* Can I purchase the item at the end of the lease?
* Are there additional monthly fees?
* Can the item be upgraded at any time?
* Are there limits on the amount of use per month? (e.g. miles driven, pages copied, papers printed, etc.)
* Can I test the equipment? If I find it doesn’t fit my needs after a few months, can I try something else out?
Before making a final decision to lease a piece of equipment, be sure to answer all of these questions before locking yourself into a strict contract.
Leasing is not the right option for everyone. In the long term, it is probably not the cheapest option. However, for an entrepreneur that is just starting up and wants to keep a great deal of money reserved for cash flow, leasing can free up money and eliminate the need for personal loans. Before deciding to lease or buy, weigh out your options and consider all of these factors to make the best decision for your company’s future.
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