Lease or buy business equipment: compare the cash commitments

A lease payment and a purchase price describe different cash commitments. Compare both options over the period your business expects to use the equipment, with the same capacity, maintenance standard, and availability requirement. A lower initial payment can preserve cash while creating a longer contractual commitment. Ownership can leave resale value, but the amount and timing of that value need evidence.

BDC's equipment guidance recommends examining the wider costs, including installation, financing, maintenance, and downtime. Start by obtaining complete written proposals. Record what each includes and who bears the cost when equipment fails, needs replacement, or is no longer suitable. A sales summary may omit the condition that changes the decision.

For a purchase, include delivery, installation, training, maintenance, insurance differences, and eventual disposal or resale. If buying with a loan, show the actual deposit, loan proceeds, repayments, interest, and fees in the funding view. Avoid counting the full purchase price and all loan principal repayments as if both were separate equipment costs without recognizing the loan funding.

For a lease, capture upfront charges, each scheduled payment, escalation, usage limits, service exclusions, return conditions, and any purchase option. Check whether the agreement is cancellable and what early termination would cost. Include the first payment's timing, which can differ from an assumption that all payments occur at month-end. Keep uncertain charges as explicit scenarios.

Check the payment trigger against delivery and acceptance. If either proposal requires cash before the equipment passes an operating test, show that exposure and the contractual remedy in the approval record. A delayed installation can move the first useful output without moving the first payment.

Consider a hypothetical three-year requirement. Buying costs $90,000 upfront, maintenance costs $6,000 each year, and expected resale proceeds are $20,000 at the end. Undiscounted net cash cost is $88,000. Assume a lease instead requires $5,000 upfront, 36 monthly payments of $2,700, and $3,000 of return costs, with maintenance included. Its undiscounted cost is $105,200.

The purchase has the lower total in this illustration but requires much more initial cash. The comparison excludes taxes, financing, differences in service performance, and discounting. None of the figures is a market quote. Replace every assumption with the actual proposals before using the model for approval.

Change the expected usage period, resale value, maintenance cost, and downtime. If demand falls after eighteen months, compare the cost of selling an owned asset with the actual lease exit obligation. If the equipment becomes obsolete early, test the cost of replacement under each contract. Ask operations to support capacity and availability assumptions instead of treating finance's spreadsheet as a technical assessment.

For a material decision, examine discounted cash flows using a suitable rate and consistent timing. ACCA's investment appraisal guidance addresses how inflation, tax, working capital, and other cash assumptions affect such analysis. Show the business's lowest forecast cash balance under each option as well as total cost, because the affordable timing and the lowest lifetime cost may differ.

Do not assume leasing keeps an obligation off the balance sheet. For example, IFRS 16 generally requires lessees to recognize a right-of-use asset and lease liability, subject to its provisions and exemptions. U.S. GAAP and other frameworks have their own requirements. Ask the accountant to assess the actual contract and explain the effect on reports and any lender calculations.

Tax treatment also depends on the arrangement, jurisdiction, and business circumstances. Add a tax case only when an adviser has supported the assumptions and timing. A possible deduction is not the same as an immediate cash refund. Keep depreciation and other noncash accounting charges out of an unadjusted cash comparison while including relevant tax cash effects when properly assessed.

Present the chosen option, alternative, cash schedule, uncertain assumptions, and conditions for approval. Attach the proposal version used in the model. If the decision depends on maintenance coverage, an exit right, or a supported resale value, name that condition. Recheck the economics when the final contract changes a material term.

Assign someone to maintain the equipment record, payment schedule, service commitments, and end-of-term reminder. Plan a later review comparing actual use and cash costs with the approval case. That record will make the next replacement decision more useful than another comparison built entirely from supplier marketing.