New Equipment: Lease or Purchase?

      A shop owner is looking at a major investment in machinery. Should he consider leasing? Experienced business owners weigh in. July 24, 2005

Question
I've never leased anything in my life. I either buy it outright or borrow from my bank. I'm considering a purchase of better than $100,000 and would like to consider my options. What do you have to put up to lease? In other words, if you don't pay up, what do they do? I'm an LLC if that matters. Any help is appreciated.

Forum Responses
(Business and Management Forum)
From contributor B:
I'm leasing-to-buy my bander. I am liable for the entire amount of the lease, not just my company, but me personally. There are no early payoffs and I own everything else. It was gut wrenching to sign, but I had to extend my cash reserves. I looked at a bank loan, but the lease rates were better than my bank. Being self-employed, who knows if I'll still be in business. But if you never try you'll never win. If you don't pay up, they come take it all away.



From contributor R:
I've leased a couple of pieces of equipment, and one thing to remember is the leasing company is going to want to see that you have insurance on whatever you buy. So you will be asked to prove that, and if you don't they will provide insurance for you, but you will pay so much you will want to get your own insurance.

One thing to be aware of is that some leasing companies will not inform you that your lease is about to end and they will keep charging you a monthly fee, which sounds like a rip-off. It is, so ask a lot of questions and read the fine print on what you will owe at the end of your lease. Will it be a 10% buyout or a dollar buyout? Leasing can be a good thing because it allows you to free up some cash for more important things, and don't forget you will be paying interest on your purchase, so the shorter term the better.



From contributor M:
I'm a one man show also, and I would think twice before taking a lease or any bank loan. If you must have this equipment, pay yourself for a year or so and then pay cash. If you get hurt or sick, you don’t have the shop help in place to keep production up to pay the bills. I use a large mill in my area to band, post-form, and cut tricky parts out on there CNC router. It improves my product at a small fixed cost, and I don’t pay for years on equipment that becomes obsolete.


From contributor F:
I think you have to look at a lease as how much money will you be making with this lease and how much cash flow it will free up. We leased a wide belt just over a year ago and it has paid for itself over and over. Yes, you take more chances with a lease if you get sick or hurt, but I think you should set up your company just in case this happens that you can rely on others to help you till you get back on your feet. I will only take one lease out at a time. Planning is the key.


From contributor P:
Last year I purchased a new Altendorf slider. I got a bank to give me a business loan with low interest. I like the fact that I can pay down the principal or just pay it off if I get a lump sum of money. As far as I know, the business loan makes me look much better on paper than a lease.
Remember to justify the purchase.


From contributor J:
I leased for the first time three years ago. I will never do it again as long as I live. I can see no benefits to it compared to borrowing the money and purchasing. I thought I read the contract pretty well, but to my surprise I'll owe 10% of the original price of the machine after I've paid on it for five years. No buy out, no early payoff, and I have to carry a special insurance policy on this machine. Another lesson learned the hard way.


From contributor E:
Equipment leasing for a small business is not a good idea. Consider this: if you decide you need to change the machine, you must pay off the lease including all of the interest, and you will take an enormous hit. For example, say you lease to buy a $10,000 machine, and the interest over five years is about $2,700. Then let's say you need to upgrade the machine a year later, you will still have to pay the full interest, plus the machine will be worth at least 30-40% less than new, so that leased $10,000 machine would cost you about $5,700 to $6,700 for one year of use. Look for financing that allows you to pay off early and save the interest.



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