Lease or Buy: Strategic Asset Acquisition for Small Businesses

For small business owners, deciding whether to lease or buy assets such as property, vehicles, machinery, or licenses is a critical decision with long-term implications. This decision hinges on various factors, including financial situation, asset value and usage, expected return, and tax implications.

 

Advantages of Buying Business Assets: Owning an asset provides control and the opportunity for asset appreciation. It allows for depreciation under the Capital Cost Allowance, spreading the cost over time. However, it comes with upfront costs and additional expenses like maintenance, taxes, and insurance. Buying makes sense when you have sufficient capital, expect a high long-term return, require rare or appreciating assets, or can benefit from tax advantages​​.

Illustrative Scenario for Buying: Consider Ethan, a baker with a $100,000 cash reserve looking to buy industrial ovens. Given his sufficient funds and high business needs, buying is sensible. However, if he plans to retire soon or if the asset is likely to become obsolete, leasing is a better option​​.

 

Benefits of Leasing Business Assets: Leasing offers access to expensive assets at a lower initial cost, providing flexibility and freeing up capital for other uses. Lease payments are typically deductible from taxable income, and maintenance costs are usually borne by the lessor. Leasing is favorable for short-term use, startups with limited capital, or when business needs are volatile​​.

 

Leasing Considerations: The cost of leasing may increase over time. For long-term needs, the total cost of leasing can exceed that of buying. Businesses often lease for seasonal requirements or rent spaces like warehouses when buying isn’t feasible​​​​.

 

Assessing Long-Term Business Plans: Your long-term business strategy is crucial in determining whether to lease or buy. For example, an e-commerce company may lease a warehouse for flexibility, while a warehousing company with sufficient financing might buy to rent out space to others​​.

 

Conclusion: Whether to lease or buy a business asset is a decision that should align with your business's long-term strategy and financial health. Understanding the benefits and drawbacks of each option is essential in making an informed choice that supports your business goals.