Buy or Lease the Equipment?

Short Answer: Compare three things: the cash each option takes up front, the total cost over the years you'll actually keep the equipment, and how hard you'll use it. Leasing usually needs less cash at the start and gives you a fixed monthly cost. Buying, even with a loan, usually costs less if you keep the equipment past the lease term, and it doesn't penalize heavy use. If cash is tight today and you replace equipment every few years, leasing can make sense. If you run equipment hard for many years, buying usually wins.

A new truck, mower or piece of kitchen equipment is one of the few decisions where the dealer offers you two very different ways to pay, and both sound affordable because both are quoted as a monthly payment. The monthly payment is the least useful number in the comparison. The ones that matter are below.

What's the Difference Between Buying and Leasing?

Buying means you own the equipment. You can pay cash or take a loan, usually with a down payment. When the loan is paid off, the payments stop and the equipment is still yours to use or sell.

Leasing means you rent the equipment for a set term, often three to five years, for a monthly payment. At the end you hand it back, or in some leases buy it at a set price. Many leases limit how much you can use it, such as a mileage cap on a vehicle, and charge for excess wear.

A Worked Example: Greenline's Third Truck

Take a hypothetical landscaping company, Greenline Landscaping: one owner, a crew of four, two trucks, about $520,000 a year in revenue. It is already paying $1,500 a month of principal on an existing truck loan. The owner needs another work truck that costs about $45,000.

The terms below are illustrative assumptions, not quotes. Real rates, lease terms and resale values vary by lender, dealer and truck, so get actual offers before deciding.

Which Costs Less Over Three Years?

Over a three-year horizon, the net cost of buying is what you've paid, plus what you still owe, minus what the truck is worth:

Close to a tie. Buying comes out about $1,500 ahead, and that gap depends heavily on the resale assumption: if the truck is worth $22,000 instead of $24,750, the lease comes out about $1,200 ahead.

Then add how the truck is actually used. Landscaping trucks haul trailers and run long days. If Greenline drives 20,000 miles a year against a 15,000-mile cap, and the lease charges an assumed 25 cents a mile over the cap, that's 15,000 extra miles and $3,750 more at the end. The lease now costs $31,950, and buying is about $5,300 cheaper.

Which Costs Less Over Six Years?

Work trucks tend to be kept long after the loan is paid. Over six years, buying means five years of payments and one more year with no payment at all. Leasing means two back-to-back leases:

Over six years, buying costs about $17,100 less, even after about $7,800 of loan interest. The longer the equipment stays useful, the stronger buying gets, because the lease never stops.

When Does Leasing Make Sense?

• When cash up front is the constraint. Greenline ended its last April with $4,500 in the bank (see Profit Is Not Cash). A $9,000 down payment in spring could leave it unable to cover payroll; $3,000 might not.
• When you want to replace the equipment every few years anyway, for reliability, warranty coverage or technology that goes out of date quickly.
• When use is light and predictable, so mileage caps and wear charges won't bite.

How Do Taxes Change the Answer?

Both options are usually deductible for a business. With a purchase, you deduct the cost over time through depreciation (spreading the cost over the years the equipment works), and current rules often let a business deduct much of it in the first year; the loan interest is deductible too. With a lease, the payments are generally deductible as a business expense. Over the life of the equipment the difference is mostly timing, and the first-year rules and vehicle limits change, so ask your tax preparer how they apply to the specific equipment before you let taxes decide.

What to Look For

• Cash on hand after the up-front payment. If it drops below a month of fixed bills and payroll, the cheaper option on paper may be the riskier one.
• How long you really keep equipment. Look at the last truck or machine you replaced. If you ran it for eight years, compare the options over eight years.
• Total monthly debt and lease payments against gross profit. Greenline already pays $1,500 a month of principal. Adding $700 to $730 more a month is a real share of a slow winter month.

What a Finance Consultant Would Do Next

A consultant looking at Greenline would get real loan and lease offers, check the truck's likely resale value, and compare the two over the eight or so years a work truck usually lasts in this kind of business. They would also map the down payment and the new monthly payment against the winter months, when revenue drops to about $18,400 a month and the existing loan is still due.

That analysis is what Occam's Model runs on your own books. It records your equipment, loans and cash, lets you model a new purchase and how you pay for it in a month-by-month forecast (with the slow months you shape in yourself) that shows how long your cash lasts, and lets you test changes to your debt on a copy of your business. When you need extra help, an expert can review it with you.

Common Questions

Is it better to lease or buy a work truck?
If you'll keep it longer than a typical lease term and drive it hard, buying usually costs less. Leasing helps most when cash up front is tight or you replace vehicles every few years.

Is leasing equipment tax deductible?
Lease payments are generally deductible as a business expense. Purchased equipment is deducted through depreciation instead. Rules and limits change, so confirm with a tax preparer.

Should I pay cash or finance equipment?
Paying cash avoids interest but can drain the cushion you need for payroll and slow months. Many owners finance equipment and keep cash for the operating cycle.

What happens at the end of an equipment lease?
You return the equipment, and may owe charges for extra use or wear. Some leases let you buy it at a set price instead. Read the end-of-lease terms before signing, since they decide the real cost.