Whether you should lease or buy equipment for your manufacturing business depends on many factors. Take into account how large your business is, how important the machinery is for you and your budget.
This set of six questions will help you decide about which form of machinery financing is right for you.
Can you pay upfront?
Leasing: If your manufacturing firm does not have funds for an outright purchase, this is the right option for you. However, it may prove to be more expensive in the long run.
Buying: If your business has the money to buy the equipment, this may be cheaper and quicker than leasing.
Do not invest in low-cost machinery, which may become outdated quickly. Consider taking a machinery loan to get the best machinery for your business.
Let’s consider a leather belt manufacturer, for example. He may buy hand tools, upper leather skiving machines and side creasing machines since they cost less. However, he may lease power-operated strap cutting machines and industrial sewing machines because they are expensive.
Do you use sophisticated equipment?
Leasing: It may be better to lease sophisticated equipment as it is expensive and high-maintenance. Sometimes, repair services are part of the lease agreement, making machinery maintenance easier. Also, if your machinery is likely to become outdated soon, a short-term lease is better than an up-front purchase.
Buying: The drawback of buying advanced machinery is the high cost and the added repairs and upgrading. However, if this equipment is vital to your business, you can consider buying it and then selling it off in the future. Also, if your machinery can become obsolete soon, it might be expensive to buy it.
Let’s use the same example of the belt manufacturer. Since none of the equipment was hi-tech, he could buy most of it by taking a machinery loan with a high limit of Rs. 45 lakh and was approved in 24 hours.
Additional read: How to Choose The Right Machinery Supplier
Does your equipment require constant replacements?
Leasing: Your equipment could need constant upgrading if you are a part of a fast-paced tech industry. Leasing would enable you to get upgrades at low costs or even for free, depending on the contract terms.
Buying: When purchasing machinery, keep in mind the cost and frequency of upgrades. Choose a brand that offers good warranty policies and is reputed for its customer service.
For example, a belt manufacturer’s industrial sewing machine could require frequent upgrades of parts like regulators or level pressers. However, he still chose to buy these sewing machines since these small parts are not expensive.
Are you looking for an easy and quick solution?
Leasing: Your sense of urgency in acquiring new machinery could be a deciding factor. If your needs are urgent, leasing may not be right for you because it involves time-consuming paperwork and the signing of a contract between the lessor (the firm leasing you the equipment) and the lessee (you).
Buying: Where time is a constraint, and your business needs the machinery immediately, buying it is a more feasible option since it involves no formalities. All you have to do is pay, and your machines will be delivered to you. Do consider the shipping time for your equipment if you cannot source it locally.
Say the leather manufacturer just got an urgent order for belts. He received a 50% advance to carry out the order. In this case, he chose to take a machinery loan, in addition to the advance payment, to help finance the purchase of a few expensive machines that he knew would help him fulfill the order quickly.
What are the deductible benefits?
Leasing: Depending on what type of lease you take, you can deduct the full lease payment of machinery or the interest on the monthly payment as an operating expense.
Buying: A direct purchase allows you to claim depreciation on your machinery, which are business assets. Get the help of a tax expert who can gauge how your business can save more tax under section 32 of the IT Act. The leather manufacturer noticed that he was saving more tax on leasing his costly machines.
Additional read : Commonly Asked Questions Around Machinery & Equipment Loans
Do you need to add to the list of company assets?
Leasing: You cannot add leased assets to the assets your business owns. The equipment still belongs to the lessor.
Buying: A direct purchase lets you add the assets acquired to the balance sheet and strengthens your business’ financial standing.
The leather manufacturer was keen to buy most of his machines because he wanted to strengthen his books for a capital infusion in the form of a machinery loan.
While these six questions will help you, the final decision depends on the cost and your need for advanced equipment.
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