Sometimes owning a small business means making decisions you never expected. Small passion projects that begin with all handmade products can experience the kind of success that suddenly means the owners have to look at renting warehouse space, ordering machinery and deciding what kind of equipment financing best fits their needs. If you find your business at this growth point, read on for more information about evaluating equipment financing.

Finance or Lease?

The first decision is whether to lease or finance. Both options will break down your purchase into manageable payments. If you finance your purchase, you will actually own your equipment when you’ve paid it off. A capital lease has a similar outcome, in that you will likely take on the equipment after the end of the lease. The difference between these two is how it affects your taxes. When you buy the equipment you can amortize its cost over the life-cycle of the equipment and you can write off the loan interest on your taxes. A capital lease usually allows you to deduct the full lease payment. 

Another option is an operating lease. Operating leases are usually used for equipment that has a short life expectancy. Technology like computers and copiers aren’t going to be worth much in three or four years, so if you buy it outright, at the end of paying for a system you can be stuck with some very expensive doorstops. With an operating lease, you’ll have the option to replace and upgrade equipment, continuing to renew your lease.

Benefits of a Lease

There are obvious benefits to buying and owning your own business equipment, especially if they are low-maintenance items that have a long life-expectancy, but there some lease benefits to consider. First, there is usually quite a bit less initial investment. You don’t have to make a downpayment, or at least a large one, on a lease, so if your budget is tight, leasing can offer you a way to expand your business without taking out a large loan. If your business doesn’t have established credit or you have less than stellar credit it can also be easier to get a lease for equipment. Finally, many leasing agreements include maintenance. Not having to pay for unexpected repairs can be a huge weight off your shoulders if your business is running month-to-month.

No matter which option looks better at first glance, it is important to talk to your accountant about the tax implications and long-term costs of financing versus leasing.