If you own a small business, figuring out how to successfully expand your operation is likely one of your top concerns. While obtaining equipment, inventory or assets can help your company, you should also understand how to best go about your acquisition.
Buying your equipment might not be your only option. A leasing agreement could better enhance the financial health and long-term sustainability of your business. Still, each option comes with its own set of benefits and drawbacks.
Buying assets and equipment
A purchase means you own your new acquisitions outright. This can build equity in your business, which may serve as collateral for future loans or investments. Ownership also gives you the freedom to customize assets and equipment to suit your specific needs. You could even buy assets that appreciate, boosting your opportunity for capital gains.
However, purchasing equipment can become a detriment if you invest too much capital into a significant upfront investment. You are also responsible for maintenance, repairs, and upgrades, which can be unpredictable and costly. Finally, your assets might lose value over time, impacting your balance sheet.
Leasing assets and equipment
Leasing usually requires less money upfront, allowing your business to conserve capital for essential expenses. Your monthly lease payments also provide a predictable budget item, simplifying your financial planning. Leasing allows you access to the latest equipment and technology, plus you might secure an agreement to have your lessor maintain and repair your leased equipment.
On the downside, since you do not own the equipment, you cannot build equity with them. Also, leasing can become expensive since you will make regular payments without ownership benefits. Additionally, lease agreements come with terms and conditions that you must adhere to, which can limit flexibility and may involve penalties if you try to terminate the contract early.
According to the U.S. Small Business Administration, about 20% of small businesses fail in their first year, and only around 50% of small companies make it past five years. Any step you can take to safeguard your business capital when expanding your enterprise should help your company avoid premature failure.