Know When to Lease or Buy an Asset in Corporate Finance

Share

A robust analysis of both leasing and buying financing options is critical to a company’s growth and profits. Opting for a lease means your asset will be paid for over a predetermined period, whereas if you choose to buy, the asset is purchased and fully owned by the company. However, this all depends on the type of item that you are looking to either lease or buy, the value of the asset, how you want your company’s financials to look and the capital your currently business has. For this reason, correctly tracking both is integral to accurate capital planning. Here are some things to consider when deciding between leasing or buying an asset and the advantages of each.

Advantages of Leasing and Buying

When it comes to leasing, there is a benefit of having ownership of an asset without having all the risks associated with it. For instance, many companies prefer to lease in terms of real estate, as usually, maintenance is handled by the owner. There may be costs associated with maintenance, however, as major maintenance tasks are usually handled by the lessor. Another consideration when leasing is that it can provide organizations with liquidity when they need it. When purchasing the asset, resources that may be needed by the organization later are tied up.

However, buying an asset is usually considered an investment in the long-term, as rent for a building tends to increase over time, while payments on a purchased building have a fixed rate. Therefore, a business that needs to be located in one space for a long period of time might be better off buying than leasing. With this in mind, here are some things to consider when deciding whether to lease or buy an asset.

Considerations When Deciding to Lease or Buy

Usually, it’s a good idea to lease an asset if there are chances of it becoming obsolete fast. Also, if you don’t want to invest your cash reserve or go into debt for an asset, leasing is better than buying. Along the same lines, if you don’t know how long you will need the asset, or you prefer using it for a short period, then you should consider leasing. Usually, a lease can run anywhere from 12 to 60 months, giving you plenty of time to use the asset and then decide whether you still need it once the contract is up.

If, however, you would like more control over the asset, then you should consider buying it. Also, if you are using it constantly and it’s easy to update or upgrade in case of a demand increase, buying the space allows you to adapt to new needs and control every aspect of how you want to use that space. Another thing to consider when buying is whether there is a good second-hand market in case you ever want to sell the space.

Time You Need the Asset For

Different types of assets will be needed for different lengths of time. With this in mind, consider whether it’s more reasonable to lease or buy the asset. For instance, equipment, such as computers, requires regular updates to maintain their usefulness. If support and maintenance are included, a leasing option can help keep them up to date at a known cost, whereas budgeting for additional updates would need to be added separately if the computers were purchased outright. On the other hand, if you are set on making a real estate investment to use constantly and without plans of relocating in the near future buying may be a better option.

What is Financially Feasible

When weighing options to lease or buy, consider the length of the lease terms. While some assets may be less expensive to lease, it’s important to fully understand the terms of the lease before making a decision. Equipment use should terminate around the same time as the lease expires to avoid overpaying. Purchased equipment, on the other hand, can be resold when you no longer need it. However, the best way to determine what is the best option for you financially is to research your options. Consider all the costs, whether one-time, recurring, alterations, maintenance, repair and upgrades and any other costs associated with both leasing and buying the asset. With this information, you can compare and determine which option is the best for your business and your needs. Furthermore, it allows you to evaluate your financial situation and forces you to think ahead to ensure that you maintain positive finances.

Mix It Up

Depending on your business needs and each asset you are interested in, you don’t have to go all-in with one or the other for all assets. For instance, it may be more feasible to lease one asset and buy the other, depending on their individual features. Also, buying second-hand may also be a viable option. Fortunately, having this freedom allows you to individually evaluate all the assets you need and make the best overall decision for your business. Research about every asset is key.

New Lease Accounting Standards

The Financial Accounting Standards Board (FASB) and the International Accounting Standards Board (IASB) released new lease accounting standards ASC 842 and IFRS 16, respectively, in 2016. These new standards require all lease types to be recorded on the balance sheet. Although the new standards impact accounting, it does not have any significant effect on leasing. Therefore, your decision to lease or buy should be made using a cost-benefit analysis. This will allow you to focus on what the costs of the asset are and whether they will change over time. Leasing versus buying is a never-ending debate, but hopefully, the information in this blog can help you make an informed choice that fits with your business needs. As for accounting, you can use lease accounting software which will help you to implement new standards easily. Yardi Corom’s lease accounting software will help your business to comply with the new lease accounting standards of ASC 842 and IFRS 16. For more information, schedule a demo here