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Tech equipment–computers, IT equipment, and related items–poses some unique issues for businesses trying to decide whether to lease or buy. Tech equipment becomes obsolete more quickly than almost any other type of equipment, making it a poor long-term investment. At the same time, many businesses need to keep their tech hardware up-to-date in order to remain competitive. Should you buy or lease your tech equipment? Read on. How Does IT Equipment & Computer Leasing Work?The word “lease” is often associated with rental agreements — like the ones you sign when you rent an apartment or lease a new vehicle. While those examples are the most common, the term has grown to encompass a number of other types of agreements. Capital VS Operating LeasesWhile there are an enormous number of lease types with names like “triple buyout lease” or “synthetic lease,” almost all of them fall under two major umbrellas: capital leases and operating leases. A capital lease encompasses leases like conditional sales agreements as well as $1 buyout leases and $10 buyout leases. A capital lease transfers ownership of the item in question to you, the lessee, either immediately or early during the lease’s terms. For all intents and purposes, the item is considered yours–it’s an asset on your balance sheet. Compared to operating leases, you’ll have higher monthly payments but a much smaller residual payment at the end of your lease (hence the $1 buyout, for example). You rarely, if ever, have the opportunity to return the equipment at the end of your lease. And why would you? You’ve already paid for its entire value, plus interest. If this sounds a bit like a loan, it should. You’d essentially use a capital lease as an alternative to an equipment loan. Operating leases are more traditional leases. In fact, they’re sometimes called “true leases.” With an operating lease, the leasing company retains ownership of the equipment while you’re giving operating rights to it. This means the equipment is considered an operating expense for your business, rather than a purchasing expense. The most common type of operating lease is the fair market value lease (FMV). Typically, monthly payments will be lower with operating leases, but the amount left over at the end will be larger. Operating leases usually give you the option of returning the equipment to the leasing company at the end of your lease. You also have the option to buy it for its fair market value price, but in most cases, you’d be better off with a capital lease if you prefer to keep your equipment. Buyout AgreementsIf a lease has a buyout option, that means that you have the option to purchase (buyout) the equipment at the end of your lease. Many types of leases are named for the terms of the buyout. For example, a fair market value lease grants you the option of buying the item at its fair market value. A $1 buyout lease? You guessed it; you can buy the equipment for a dollar at the end of your lease. Why the enormous difference in buyout amounts? Remember, a capital lease frontloads the cost of the equipment into your monthly payments. The $1 residual is essentially just a formality; you’ve already paid for the item. On the other hand, with an FMV lease, you’ve only been renting, so the cost to buy is based on what a used piece of equipment that age would cost on the market. There are a lot more obscure types of lease agreements that you may run into, but generally speaking, you can expect capital leases to have small, insignificant residual payments and operating leases to have larger, more significant ones. Common Lease TermsEquipment leasing comes with a lot of jargon. Let’s demystify some of it.
Leasing VS Buying Computers & IT EquipmentSo why would you lease tech equipment instead of buying it? Let’s look at some of the advantages and disadvantages of leasing tech equipment. Advantages Of Leasing
Disadvantages Of Leasing
Advantages Of Buying
Disadvantages Of Buying
Computer Leasing VS Buying: Which Is Better For Your Business?There are advantages and disadvantages to both buying and leasing computers and IT equipment. Consider leasing equipment with a high turnover rate if you work in an industry where being on the bleeding edge is advantageous. On the other hand, if you have modest tech needs and can comfortably use the same gear for longer than five years, it may make more sense to just simply buy the equipment you need. There are additional considerations for businesses trying to smooth out their cash flows or otherwise apply their limited resources to maximum effect. Don’t have the cash to buy outright but aren’t sure if a lease is right for you? Consider an equipment loan. Not sure where to look for equipment financing? Check out our Best Equipment Financing Companies. Just starting out and need equipment for your office? Try our guide on how to Get The Equipment You Need For Your Startup Business With A Loan Or Lease.
An expert in personal and business loans and financial health, Chris Motola has been writing about small business finance and payments for over 5 years. He has been cited in various industry publications, including Forbes Advisor, GoBankingRates, and Medium. Chris is a graduate of the University of Central Florida. View Chris Motola's professional experience on LinkedIn. We Want Your FeedbackLet us know how well the content on this page solved your problem today. All feedback, positive or negative, helps us to improve the way we help small businesses. Give Feedback Read Next
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