Learn how to compare the costs of leasing or buying equipment for your business, including initial, operating, opportunity, depreciation, and financing costs.

It's important to consider the relationship between efficiency and reliability of the equipment to its age. Certain equipment experiences a drastic fall in the efficiency and reliability with the age. In such cases while evaluating the buy option, we should add the cost of any disruption to the business associated with fall in reliability. A classic example is aircraft's. The efficiency and reliability falls drastically after the initial 5-8 years, even though the life of aircraft is about 20 years.

What are the most important costs to consider when choosing between leasing or buying equipment?

Leasing or buying equipment is a common decision that businesses face in corporate finance. Both options have advantages and disadvantages, depending on the type, use, and value of the equipment. However, one of the most important factors to consider is the cost of each option, not only in terms of the initial payment, but also in terms of the future cash flows, taxes, risks, and opportunities. In this article, we will discuss some of the most important costs to consider when choosing between leasing or buying equipment.

1 Initial Cost

The initial cost is the amount of money that you have to pay upfront to acquire the equipment, either by purchasing it or by signing a lease contract. The initial cost can vary depending on the terms and conditions of the deal, such as the interest rate, the down payment, the security deposit, and the fees. Generally, buying equipment requires a higher initial cost than leasing it, since you have to pay the full or partial price of the equipment, while leasing only requires a fraction of it. However, a higher initial cost can also mean lower future payments, which can be beneficial in the long run.

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Luis Gustavo Costa ⚡️

Cloud | Web3 | Business Development | GTM | SaaS | DEFI | Crypto | Salesforce | ARR | Marketing | Strategy | Sales | Budget | Controlling | Finance | Cost | Audit | SAP | FP&A | Supply Chain | Revenue | Growth
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When choosing between leasing or buying equipment, the most important costs to consider include the initial purchase price or lease payments, ongoing maintenance and repair expenses, depreciation or lease amortization costs, potential financing costs such as interest rates for loans or lease financing, and the residual value or end-of-lease buyout options. Additionally, operational costs like insurance, taxes, and storage fees should be factored in to make a comprehensive comparison between leasing and buying.

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2 Operating Cost

The operating cost is the amount of money that you have to spend to maintain and use the equipment, such as repairs, maintenance, insurance, utilities, and taxes. The operating cost can depend on the age, condition, and efficiency of the equipment, as well as the frequency and intensity of its use. Generally, leasing equipment means that you have less responsibility for the operating cost, since the lessor usually covers some or all of these expenses. However, leasing can also limit your control over the quality and availability of the equipment, which can affect your productivity and performance.

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Yogesh Sakunia

Venture Capital | Finance Expert | Trainer | Product Management | CA | IIM C | Entrepreneur
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It's important to consider the relationship between efficiency and reliability of the equipment to its age. Certain equipment experiences a drastic fall in the efficiency and reliability with the age. In such cases while evaluating the buy option, we should add the cost of any disruption to the business associated with fall in reliability. A classic example is aircraft's. The efficiency and reliability falls drastically after the initial 5-8 years, even though the life of aircraft is about 20 years.

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3 Opportunity Cost

The opportunity cost is the amount of money that you could have earned or saved by choosing a different option, such as investing, saving, or using alternative equipment. The opportunity cost can reflect the trade-off between the benefits and costs of each option, as well as the potential risks and uncertainties. Generally, buying equipment means that you have more opportunity to use, modify, or sell the equipment as you wish, which can generate additional income or savings. However, buying can also tie up your capital and reduce your liquidity, which can limit your flexibility and options in the future.

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4 Depreciation Cost

The depreciation cost is the amount of money that you lose due to the decrease in the value of the equipment over time, due to wear and tear, obsolescence, or market changes. The depreciation cost can affect your accounting and tax calculations, as well as your net worth and profitability. Generally, buying equipment means that you have to bear the depreciation cost, since you own the asset and its residual value. However, buying can also allow you to claim depreciation as an expense and reduce your taxable income. Leasing equipment means that you avoid the depreciation cost, since you do not own the asset and its residual value. However, leasing can also prevent you from benefiting from depreciation as a tax deduction.

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5 Financing Cost

The financing cost is the amount of money that you have to pay for borrowing or lending money to finance the equipment, such as interest, fees, and charges. The financing cost can depend on the source, amount, and duration of the financing, as well as the credit rating and risk profile of the borrower and lender. Generally, buying equipment means that you have to incur a higher financing cost, since you have to borrow more money and repay it over a longer period. However, buying can also give you more ownership and equity in the equipment, which can increase your collateral and creditworthiness. Leasing equipment means that you have to incur a lower financing cost, since you have to borrow less money and repay it over a shorter period. However, leasing can also reduce your ownership and equity in the equipment, which can decrease your collateral and creditworthiness.

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6 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Kipng'eno Rutto

Chief Operating Officer at Avenue Lease and Rentals East Africa Limited
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Tax efficiency is paramount in leasing, where tax ownership remains with the lessor while the lessee can claim the full lease rental as a tax-deductible expense. In instances where the wear and tear allowances sanctioned by the respective jurisdiction are lower than the lease rentals, opting for a lease is prudent. Outright purchase entails limitations on deductible expenses for tax purposes, potentially placing the client in a taxable position. Conversely, choosing a lease could significantly reduce their tax liability while ensuring access to up-to-date technology.

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What are the most important costs to consider when choosing between leasing or buying equipment?

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1 Initial Cost

2 Operating Cost

3 Opportunity Cost

4 Depreciation Cost

5 Financing Cost

6 Here’s what else to consider

Corporate Finance

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