Should your supply-chain business buy or lease equipment?
Much like manufacturers, businesses in the transportation, distribution and logistics space invest in a lot of equipment. From trucks for shipping to machines that pack, move and store products, businesses across the supply chain must regularly invest in new equipment to stay competitive, scale up, and do their work.
The catch? This equipment, while essential, is often expensive. That means a big financial burden for businesses that tend to operate on tight margins. Also, we’re talking about logistics here, so of course the conditions in which these businesses operate are always changing. The equipment that’s good enough for today may be obsolete by tomorrow.
Each time a business plans to invest in new equipment – which, in this industry, happens all the time – management must make a decision: Should we buy the new asset or lease it?
That decision’s important for all the reasons we mentioned above and more. We’re talking about a significant investment of capital with far-reaching consequences; whether you buy or lease will impact your short-term and long-term finances, as well as future investments.
So… should you buy or lease? The answer isn’t as clear-cut as you might think.
What is a lease vs. buy analysis?
At D+L, we’ve partnered with transportation, distribution and logistics businesses in the Chicagoland region for decades, so we know how important it is to make the right call when choosing whether to buy or lease. We also know how complex that decision can be.
One way we help our clients make the right call is through a lease vs. buy analysis, a type of cost-benefit analysis that helps clients determine whether they should buy or lease.
The fact is, buying isn’t inherently better than leasing, and leasing isn’t inherently better than buying. The right option all depends on your business’ current financial situation, as well as upcoming investments, the type of equipment, the lease terms, interest rates, and how your company plans to use the equipment. A lease vs. buy analysis accounts for all those factors and determines whether your business would benefit most from leasing or buying—at this moment, in this situation.
Let’s take a closer look at some of the factors we consider when advising our clients whether to lease or buy equipment.
Leasing: Pros and Cons
As we mentioned above, leasing isn’t necessarily better than buying. But between the two, it is the more flexible option.
Pros: When you lease, you get most of the benefits of ownership, while assuming less risk. You don’t have to worry about a big upfront investment, and since leases often require lower monthly payments than purchases, you’ll have more cash on hand for other investments. If unexpected issues crop up, as they so often do in this industry, you’ll have more cash available to deal with them than you would have if you’d purchased. Plus, you may not have to deal with the hassle and expense of maintenance and replacement parts, as they’re often covered under the terms of a lease.
Finally, leasing is often a good choice for businesses that regularly upgrade their equipment. By coordinating a lease carefully, you can ensure that it will expire around the same time you’ll need to upgrade the equipment, allowing you to take advantage of renewal options. And if you do decide to purchase the asset at the end of the term, many leases allow you to credit your prior lease payments toward the purchase (just be sure to review your lease agreement in advance to ensure that’s the case).
Cons: The biggest drawback of leasing an asset is that it’s not truly yours. If you want to make modifications to leased equipment, you’ll have to get permission from the lessor first. For certain assets, like shipping trucks, there may be a limit on the number of miles you can put on the vehicle during a period; violate that term, and you may have to pay a hefty penalty. Also, lease rates are not always stable. Unlike payments on an owned asset, lease payments may fluctuate due to market volatility, depending on the terms of your agreement.
Another drawback of leasing is that you won’t be able to benefit from tax deductions due to depreciation. The asset’s value only technically depreciates for the owner, so you won’t receive a tax break that may have helped you cover the investment’s costs.
Buying: Pros and Cons
While leasing may be the more flexible option, there are situations in which buying may be the smarter long-term investment.
Pros: Unlike leasing, when you buy equipment, it’s fully yours. That means you can make modifications without having to request permission, hold onto the asset for as long as you need it, and use it however you’d like. You can also sell the asset when you no long need it—meaning you’re essentially guaranteed to get some of your investment back. Buying is also generally a more stable investment; lease rates may change, but payments for buyers are usually fixed.
Another benefit of buying? You can make tax deductions based on the asset’s depreciation. Individual lease payments may be generally lower, but thanks to tax deductions and other factors, the total annual expense of an owned asset is often lower than that of a comparable leased asset.
Cons: For all the advantages we mentioned above, buying has a major drawback: the down payment.
The initial investment for ownership is often significantly larger than that of leasing. That may not be a problem for businesses with plenty of capital, but companies in the transportation, distribution and logistics industry often operate at tight margins. A large down-payment could leave your business cashless or require you to take out a loan, leading to potential cashflow issues in the future. What if you need to purchase new equipment next month, but don’t have the funds and can’t secure another loan? What if there’s an emergency or an industry-wide disruption?
Another downside of buying is that you must pay for maintenance and replacement equipment, which may be covered under the terms of a lease. Your payments may be more stable, but there could be unexpected costs along the way.
The bottom line
Buying vs. leasing is an important decision, but it’s not an easy one—especially as shifting accounting standards now require most leases to be recorded on balance sheets.
Before you make the call, take a closer look at the factors we mentioned above – especially how the investment will impact your cashflow situation – and consider how buying or leasing will impact future investments and potential tax savings.
Ideally, you’ll partner with a financial advisor, like the CPAs of D+L, who will perform a cost-benefit analysis and help you decide the best way to move forward.
Key business decisions? We’ll help you make the right call.
With nearly 50 years of experience serving Chicagoland’s transportation, distribution and logistics industry, D+L can help you navigate buy vs. lease decisions—along with all the other complex choices your business faces every day.