Considering whether to purchase or lease a new piece of equipment? What’s right for your business? There’s more to consider than the monthly costs alone. You need to look at your expectations, service life and the total cost of ownership to determine the best for your business.

How does a lease work vs. buying

Leasing is an extended-term fixed rental contract whereby the leasing company finances your use over a fixed term. The monthly fixed costs is the headline but let’s dig a little deeper into what factors make up a lease. Virtually any equipment that has a good resale market and predictable residual costs can be leased. The leasing company will take the purchase price, expected residual value at the end of the lease, interest rates and profit to come up with a monthly financing cost. At its most scientific, it’s an actuarial calculation. In sales, it’s an art not science and the leasing company will play with interest rates and residuals to sell the lease.

Tax Deductibility – both lease and purchase costs are tax-deductible, they just take a different way to get there. Lease payments are normally deductible as the payments are made – the tax deduction matches the cash flow.  This is where you may hear a salesperson say leases are tax-deductible. Asset purchase are also deductible but follow the rules of Capital Cost Allowance (depreciation), not necessarily matching the cash flow for the business. The 2022 current monthly lease limit for passenger vehicles is $900 per month plus HST. 

Which factors are used to determine a lease

The imputed interest rate in leasing vs financing options. Financing companies will have one interest rate for leasing and a different one for purchasing. There are big players in the financing market that finance and resell these in pools of assets for investors. Each investor will have different return requirements. We’ll often see a 2% interest difference between lease and purchase rates.  

Cash Flow – Obviously purchasing an asset outright would have the greatest impact to your cash flows. Purchasing and leasing will obviously spread the costs and negative cash flows over a longer period of time. Usually, leasing will have a lower monthly payment than financing arrangements.  

Off-balance sheet financing. You might consider that leasing costs may not show up as a liability or impair your credit rating.  

Bargain Purchase Options – your lease may have a bargain purchase option whereas you can buy the asset at a bargain purchase price.  In some contracts, this may be a dollar or close to the wholesale cost.

Reliability and Useful Life – The fact is newer equipment is more reliable and downtime is lost time.   What are the costs of lost days in extra work, lost revenue, lost customers etc?   Sometimes a newer vehicle has a higher cost but you avoid a lot of headaches.   I have no mechanical aptitude, have no patience for breakdowns and as such won’t suffer unreliable equipment. Something like a tractor might have a reliable life of 10 years and not be right for a lease.  

Your needs and wants. In a completely frugal world, we’d all buy a used Corolla and drive it for ten years. That might not satisfy the image you want to present to clients or might not satisfy your personal needs. We had a client request a call regarding their upcoming lease but their question was really whether to get a BMW or Mercedes..lol.

Lease Break Costs – if you expect to exit your lease before the end of the term, most lease companies will have break costs that can be quite high. We’ve seen car lease buyouts with $1,000 administration fees in addition to the buyout costs.

You’ve got alternatives! We can help you evaluate the best financing decision for your business. We’ll look at the factors above and your goals to determine the case for you. Contact us to set up a consultation.

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