Lease vs. Buy - Determining the Best Fit
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- Published: Tuesday, 23 November 2021 15:01
When looking to upgrade equipment or acquire new buildings or grain storage, leasing is often presented as an option to traditional purchase financing.
Under a standard purchase, the purchaser takes ownership of the asset immediately. The vendor is paid in full, and if necessary, the purchaser can obtain financing from a lender who will likely only finance a portion (down payment or trade-in will be needed). The terms of this loan (payments, interest rate, amortization period) are negotiated between the lender and the purchaser.
Under a lease contract, the leasing company purchases and takes ownership of the asset. The vendor is paid by the leasing company. The lessee then agrees to use that asset for a set time period, for set lease payments paid to the leasing company over that time period. At the end of the lease term, the lessee usually has an option to purchase the asset from the leasing company for a pre-determined residual value.
When making a decision on how to finance new equipment purchases for your business, it is important to understand both the cash flow and tax implications of each option.
