The question comes up quite frequently in businesses of all sizes around the country: does it make more sense to rent equipment for the business, or should a company just bite the bullet and purchase it outright? There are several factors to consider in answering this. Some businesses have special equipment needs that will require they upgrade or replace the items after only several years.
The financial resources that are available upfront is a key factor as well. Then there is some business equipment that naturally will come with expectations for a longer useful service life.
Understanding the needs of your own business will help you to make the best decision. What is ideal for one business owner or management team may not be what is best for another firm. Yet the objective question of cost is a straightforward one. By considering the following five questions, you will understand whether buying or renting equipment is more cost-effective in the short and long run.
The Five Questions
1. What is the key difference between renting and buying equipment?
A: When a business purchases equipment, it owns the equipment. It will keep the equipment until an attempt to resell it in the end, assuming there is a resale market for the equipment. Renting is an obligation-free form of using the equipment for a predetermined amount of time. This could be for months, years, or in some cases decades. When the rental period is up, the company simply returns it to the owner and stops making payments every month for it.
2. What is the main advantage of renting (sometimes called leasing) equipment?
A: The most obvious advantage is the upfront cost savings. Renting equipment costs a fraction of what purchasing it will. A small company can pick up essential business assets with the lowest possible initial financial cost by renting. Part of the reason this is so cost-effective is that rented (or leased) equipment companies will rarely ask for a down payment on the monthly rental payments. It means that the business' cash flow will not be substantially impacted by renting the equipment.
3. What about tax deductions for renting equipment?
A: Many business individuals are aware that they can deduct the purchase cost of office equipment on their taxes through depreciating it. The same business owners and managers may not be aware that they can similarly deduct the costs of leasing (renting) business equipment and tools. The actual lease payment amounts each month can be accounted for under business expenses on the company tax return. This further reduces the equipment rental expenses.
4. How do equipment rentals rectify the challenge of obsolete equipment?
A: This could be the strongest argument in favor of equipment rentals. It makes sense to rent equipment that will become outdated relatively quickly, as this would not have any resale value in any case. High tech equipment and computers or laptops are good examples of this type of office equipment that quickly lose their relevance for businesses. When the lease or rental period elapses, the business owner or manager can simply rent newer equipment that is current, and even higher-end if this makes sense for the business plan.
5. Is there any disadvantage to renting business equipment over purchasing it?
A: It may seem hard to imagine any disadvantages of rented equipment that is supremely flexible in its terms, far more cost-effective up front (and does not require any initial deposit or significant cash outlay), and effectively deals with the problem of equipment obsolescence. One disadvantage that could be a factor is the lack of building equity in equipment. Since a business does not own the items, it does not accrue any equity in the equipment. For equipment that does not suffer from becoming outdated by the end of the rental or lease period, this could be a disadvantage in that firms cannot recover a significant part of the cost laid out with rented equipment. Another factor to consider is that with leased or rented equipment, there may be a clause that requires payment for the entire term. Even if the business returned or stopped using the equipment, in these cases it would still have to keep paying for it through until the end of the rental agreement or lease term.
Therefore, it is so important to fully understand the contract on any rented or leased business equipment. Some rentals include early termination fees that can be quite steep and unpleasant. By knowing and controlling the rental agreement on such business equipment, a business owner or manager can ensure that the organization benefits from the rental versus outright buying the business equipment.