Whats the Difference Between Leasing and Financing for Business?
June 11, 2014
Whether you’re looking to acquire vehicles for your company or balancing the pros and cons of owning equipment versus leasing it, figuring out what option will work best for your business is an important decision to make.
There are a lot of factors that play into whether leasing or financing makes more sense for your business. These range from the type of asset that you’re looking to acquire (vehicles, machinery, equipment, or technology) to how long you plan to use it and how often you’ll need to upgrade. But before delving into the specific needs your company has, it’s important to understand the basics of financing versus leasing.
Leasing for Business
Benefits of Leasing
Leasing is a contractual arrangement between the owner of an asset and a person who is willing to pay to use that asset. Leasing has obvious benefits for business owners, one of which is the ability to get approval for a lease much quicker than you would if you were financing. Approval for leasing vehicles or equipment can usually come as quickly as 1â€“2 days. Leasing also offers a lower fixed interest rate, though many people don’t realize that leases come with interest rates (also sometimes called “lease rates”).
Drawbacks of Leasing
One of the downsides to leasing, however, is that you don’t get to reap the benefits of ownership. If you plan to keep machinery or equipment for a long period of time, financing to buy it outright may be a better plan. But, if you will need to upgrade machinery or equipment often, leasing can provide the flexibility of being able to upgrade without having to sell off older assets. This, in turn, can help your business stay current with technology advances without having to take on the expense of a mass upgrade on technology or business equipment.
Financing for Business
Benefits of Financing
Financing to purchase equipment or other business assets has it’s advantages too. For one, you have the benefit of ownership after paying off the loan. That also means that those supplies or machinery will add to your company’s list of assets, increasing the overall value of your business. As an added benefit, owning business assets can help you secure more substantial financing in the future which can help you grow or expand your business. It can also make your company more attractive to potential buyers or investors since tangible assets are easy to apply value to and can be sold off in the event that you need to raise money.
Another major benefit that you can reap when financing to buy is that the interest on money leaseed for business expenses is tax deductible, which can potentially save you thousands of dollars on your tax bill at the end of the year.
Drawbacks of Financing
Financing isn’t always ideal, though. If time is of the essence, and you need to obtain assets quickly, a loan may not be the best option, as it can take a much longer period to get approved. Even smaller business loans will have a more stringent approval process in place than just a leasing agreement. Gathering and reviewing financial statements, running credit checks, and finding collateral for your loan (if necessary) can seriously lengthen the amount of time it takes between applying for financing and getting money into your account.
Regardless of if you choose to lease or to lease, make sure to weigh the pros and cons of each with your banker or a financial consultant. Each business is different, and some options will make more sense than others for your company’s specific needs.