Much of running a business revolves around keeping costs under control. For startups, that means being strategic about how initial investments are made, and working to find ways to make future cash flow as predictable as possible. Some costs, however, seem unavoidable. Employees need to be hired and trained, they need space to work, and quality tools and equipment to do their jobs.
Not all of these offer a lot of options, but how your business acquires that equipment can have a profound effect on the stability of your cash flow. Businesses often opt to purchase equipment because it seems like a lower cost decision in the long term, but doing so can make it much more difficult to keep a business running long enough to benefit from any potential savings. Additionally, leasing equipment also has longer term benefits that call the value of ownership into question.
Leasing keeps financing needs manageable
The first and most obvious benefit of leasing equipment is that it can greatly reduce the amount of startup investment you need to make. This is a very big deal for businesses that would otherwise need to rely on heavy financing just to get their operations running.
Depending on your industry, equipment costs can range from a few thousand, to millions of dollars. In many cases, a new business won’t be able to access enough financing to cover those costs in the first place. Those that can are likely to spend years paying those loans off. Alternative finance options, like smaller short term business loans, can easily provide initial rental capital, and can be repaid in relatively short order. This significantly lowers financial barriers to entry for startups in a wide variety of industries.
Free up working capital, so that you can use it
Businesses that find themselves flush with investors might initially prefer to purchase tools and equipment outright, thinking that it’s simply less of a hassle. Not worrying about making regular payments certainly does seem simpler. However, it can also be bad for business.
Every non-essential penny you spend today is one that you can’t use elsewhere. It may feel like your business has plenty of startup capital, but those funds are critically important. Depending on what might benefit you most you could instead launch your business with more experienced employees, a larger marketing and sales team, or top of the line ERP software, to name just a few ideas.
For a startup, the major initial challenge isn’t in acquiring the tools to do business, it’s in developing your operations and getting established in your market so that you can begin to generate profit. Profitable businesses attract new investment, and if outright equipment purchases make more sense at that time, you can always revisit the idea then.
Eliminate unexpected maintenance and upgrade costs
The most common argument for purchasing equipment rather than leasing it is minimising long-term cost, but there are long term benefits to leasing that need to be considered as well. By leasing equipment, businesses can much more easily predict future costs.
Equipment breakdowns don’t just interrupt operations, they mean paying repair and maintenance costs. This, along with any resulting production delays, can add up to a very serious cash flow issue. Leased equipment, on the other hand, could simply be immediately turned in for maintenance and replaced at no additional cost. Those services are ultimately paid for by your rental payments, of course, but those are constant and conveniently predictable.
A disruptive new invention can render your existing equipment obsolete within an industry at any time. If you’re leasing your equipment, that’s not a major issue. You can simply terminate your lease on your old equipment and go about implementing changes at relatively manageable cost. A business that is still paying off a large investment into older, inferior equipment, however, would be left at a major disadvantage.
Depending on your type of business, you might not need many of your tools all year-round. For example, a lot of specialised farming equipment can cost upwards of $100,000 or more, only to spend upwards of 340 days every year in a shed. By renting instead of buying, individual farmers effectively distribute the cost and use of the tool, giving them a significant short and long term cost advantage over competitors who buy outright.
Of course, there are situations where purchasing your tools is prudent, and sometimes it’s unavoidable. For example, you wouldn’t be able to make proprietary modifications to a rented tool, and other equipment may need to be custom built to accommodate your needs. That being said, businesses should carefully weigh the benefits of leasing over buying whenever they can to help free up working capital and to keep short term cash flow controlled and predictable.