Manufacturing Equipment: Lease or Buy?

June 23, 2015

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There comes a time for most manufacturing companies where new equipment is an absolute necessity for increased efficiency, increased output, or new product lines. But while new equipment presents great opportunities, it can also come with significant costs. Large-scale manufacturing equipment is often much costlier than the equipment required in other businesses, and finding the money to pay for it can be a challenge.

That’s why it’s important for decision makers to consider the benefits and drawbacks of their procurement options.

Does it make more sense to take out a loan to buy the equipment outright, or to lease the equipment? The right answer will differ depending on a number of factors that are unique to each company. If you’re facing this decision in the near future, here are four factors you should consider before making up your mind.

What’s better from a tax perspective?

As far as taxes are concerned, there are substantial differences between a lease and a purchase. If you choose to lease your equipment, your payments will be counted as an operating expense, thereby reducing your tax burden. Make sure you factor the tax savings into the your calculations in order to get the most accurate idea of the cost of leasing your equipment.

If you choose to purchase your equipment outright, you are allowed to make depreciation deductions based on the type and cost of you equipment.

2. When will the equipment be obsolete?

If the equipment you’re looking to acquire is something that will have been upgraded significantly or become more efficient in the next five years, you may find that leasing makes more sense.

On the other hand, if the equipment is likely to have more or less the same capabilities five years from now that is has today, ownership may be a good route to take. If you own the equipment, you can continue to get value from it even after you’ve finished paying for it. Ownership also means that, depending on how well the equipment holds up, you have the option to resell it to help pay for a newer version in the future.

3. What are your company’s financial priorities? Are there more pressing things that need to be purchased?

Even if your company has the money or the ability to secure a loan to purchase a new piece of equipment, you may still decide that leasing is the better route to take for your current situation. It all depends on your working capital needs.

If you have other things that you’ll need to spend money on in the near future, such as hiring needs, marketing promotions, or other equipment, leasing may make more sense for your company. Leasing comes with lower upfront costs, freeing up the money you have on hand to be used on these other priorities.

On the other hand, if your company isn’t planning on spending in other areas in the near future, taking out a loan for the purchase of equipment may be a more attractive option. It all boils down to each company’s individual needs.

4. Do you want the option to purchase at the end of the lease?

Most banks, including Business Bank of Texas, can create a provision in a lease contract that allows for the purchase of equipment at the end of the lease agreement. This can be decided upfront so that the lease agreement includes a buyout clause. A lease with a buyout clause allows your company to avoid spending a lot of money up front (freeing up capital during the life of the lease) while also allowing for full ownership of the equipment in the future.

Here is a handy one-page guide to the consideration points discussed above- click to download a copy for yourself

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If you’re looking into leasing or purchasing manufacturing equipment, Business Bank of Texas can help work with you to evaluate which option makes most sense for your business. We’ll give you honest, straightforward advice, and we promise a quick turnaround for your financing decision.

If you’d like to learn more, please contact us, and a loan officer would be happy to discuss your options with you.

BBoT Guide to Borrowing Manufacturing

Topics: Accounting & Finance

DJ Lewis

Business Bank of Texas

D. J. Lewis is First Sr. Vice President, Business Bank of Texas, N.A. D.J. is responsible for business development and relationship management for Business Bank of Texas, N.A. He graduated in 1993 from the University of Houston with a BBA in Accounting. While attending college he started his career in banking working at a small Savings and Loan. In 1991 that same Savings and Loan was acquired by a large national bank. Soon after the acquisition, D.J. took advantage of an opportunity to transfer to Austin where he has called home for the past 15 years. After 19 years with a large national bank D. J. was presented with another opportunity and made the decision in October 2010 to start a career with Business Bank of Texas, N.A. D. J.’s 22 years of banking experience includes 7 years in bank operations, 6 years as a Branch Manager, 6 years as a Commercial Lender, and 3 years as a SBA Lender.
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