Should You Lease or Finance Equipment? Here’s What to Consider

Should You Lease or Finance Equipment? Here’s What to Consider

Balancing your equipment needs with a tight budget can mean making tough decisions. Whether you purchase new equipment or continue to operate older equipment, there are trade-offs. But if new equipment is what you need, financing can help you bridge the gap.

Getting Started

Before you make any decisions, it’s important to start with a well-thought-out acquisition plan. Weigh your current stock of assets against your needs, then determine if you have the capital budget and cash available to cover those needs. If not, financing can help you get the equipment you need now — even if you lack the budget to purchase it outright or have better places to invest your cash.

Financing may also allow you to consolidate multiple units into a larger purchase that could potentially qualify for “volume incentives” from the manufacturer. You could also bundle the equipment, installation costs and services into a single payment that meets your budget. Plus, financing expands your purchasing power, allowing you to maximize the dollars you have available on a predictable schedule.

Finance Option 1: Leasing

A lease is similar to a long-term rental. You acquire a piece of equipment and use it for the term of the lease. When the time is up, you typically have the option to renew the lease, purchase the machine at fair market value, or return it.

Leasing gives you the most “bang for your buck.” You don’t pay for the entire machine; only the portion that you use. You also get the flexibility to renew or purchase it later. Leasing is usually best for higher-usage items you plan to cycle through more quickly, for example, when you want to have the latest technology or avoid the higher maintenance portion of the equipment life cycle.

Finance Option 2: Conditional Sale Contract

A Conditional Sale Contract (CSC) — also called a Buck Out Lease — is an agreement where the buyer takes possession of the item and pays in installments. With a CSC, you own the machine, subject to a security interest by the finance company. It’s listed as an asset and liability on your balance sheet, so the depreciation and interest expenses may be tax deductible for tax-paying enterprises.

A CSC is often subject to more volatility based on the CapEx dollars you have available to acquire or upgrade your property and equipment. It’s best for long-life assets you plan to keep for an extended period of time. Examples include aerators or tractors — things you may not use every day but are still mission-critical for certain tasks.

More Things to Know

Whether you choose a lease or CSC, the first payment is often all that is required in advance. You can even include installation costs, sales tax and other installation expenses in the financed amount to further reduce your upfront cash outlay.

You can also rest assured that manufacturers’ warranties are unchanged, whether you buy a piece of equipment outright, lease it or put it on a CSC. Additionally, if you choose to buy an extended warranty plan or service/maintenance contract, it can be included as part of your monthly payment.

When it comes to choosing between finance companies, the important things to look at vary between a CSC and a lease. If it’s a CSC, compare the interest rates to the length of term offered. Are the fees reasonable? If it’s a fair market value lease, compare the payments, turn-in requirements and added fees.

 Additional Considerations

For any enterprise, the key always comes down to cash flow. No one solution works for everyone; it’s a matter of balancing needs with desires and available resources. The main takeaway is that financing is just another tool to help you execute your business plan more effectively. Even the most thorough budget plans can change due to sudden unforeseen circumstances. That’s when financing can help you continue with your strategy without being constrained by the limitations of the immediate resources at hand.

If you have questions about financing or want to know more about the options available from Toro, contact your local Toro distributor.