Leasing vs. Buying Equipment: A Quick Guide

Several overlapping pipes with several coins trapped in one of the pipes

Last updated on January 12, 2023 by Excedr

Is It Better to Lease or Buy Equipment for Your Lab?

Life sciences companies large and small often purchase lab equipment with cash or a loan before realizing that leasing is a viable alternative option.

Even though it presents a number of benefits for labs and other capital-intensive businesses, there will always be debate about whether to lease or buy equipment. Depending on the size, scale, and financial strategy of your lab, you might be wondering whether buying your instruments is actually the best path forward.

Rather than acquire the latest technology using cash reserves or financing (business loans, lines of credit, etc.), you can lease the equipment with Excedr instead, conserve working capital, extend cash runway, and avoid tapping into essential cash reserves.

In this article, we’ll review the benefits and drawbacks of buying lab equipment vs. leasing.

Buying Lab Equipment

Consider the Upfront Costs of Purchasing Equipment

When you pay for a piece of equipment with cash, you’re in for some hefty upfront costs. Not only are you paying a down payment, you‘re paying for all the associated costs upfront as well.

Because you‘re factoring in the additional charges, such as shipping, installation, training; installation qualification, operational qualification, and performance qualification (IQ/OQ/PQ), hardware, software, service contracts, taxes, and any additional peripherals and modules as needed, you can end up paying between 110% and 120% of the total equipment cost. These costs will significantly drain your working capital.

But, buying will obviously provide you with complete ownership. That said, if you do choose ownership, you have no hedge against equipment obsolescence.

Depending on your finances, it can be difficult for you to invest in other areas of business or purchase new equipment down the road, especially if you are years away from generating positive cash flows (i.e., earning a profit).

Not only will you have shelled out a large amount of capital, you may be tied to the fixed asset for a significant period of time with reduced flexibility as the resale value drops. It’s possible that the equipment becomes obsolete as well, with advances in technology continuing at a rapid pace.

Budget for Expensive Ongoing Payments

The initial purchase price isn’t the only significant cash outlay to consider. You generally need to budget for service contracts as well, which will cost you approximately 15% of the equipment’s list price on an annual basis.

On top of that, service contract costs will increase annually as manufacturers increase their company-wide list prices at the beginning of each year.

No Waiting Period

Cash payments eliminate the need for an approval process. This is one of the main reasons why some laboratories choose to purchase equipment upfront and own their equipment immediately.

Tax Break With a Catch

Paying for your laboratory equipment upfront will provide you with depreciation tax benefits, but the tradeoff is significantly reduced cash on hand.

You may also need to depreciate the asset per the IRS MACRS chart, which can be lengthy, depending on the asset type, your company’s tax situation, and current regulations.

You will experience this with capital leases as well, which differ from operating leases.

Keeping an Eye on Your Credit

While paying in cash might seem like a great idea when you’ve got extra capital on hand, it can have an adverse effect on your credit in the long run. Substantial reductions in your liquidity can make future borrowing much more difficult.

Keep this in mind while going through your books and determining whether you have the necessary cash available to justify an expensive upfront commitment.

Leasing Lab Equipment

Whether you‘re a small business owner, startup founder, or lab manager, you want your company to thrive. To create a successful environment, you must equip your lab with the proper instrumentation, maintain the equipment properly, and work towards having a healthy cash flows from one quarter to the next.

This becomes especially important when financial markets tighten and you need to have a cushion of cash on hand for unexpected opportunities or emergency situations. 

Unfortunately, traditional procurement options for lab equipment either drain cash balances or require founders to put up personal assets and collateral to secure credit lines.

This can leave scientists more focused on cutting their expenses to stay afloat than on investing in operations to make their next major discovery in the lab.  

Instead of relying on traditional procurement options when they don’t make sense for your financial situation, take advantage of cost-effective and founder-friendly leasing agreements that equip your business with the technology it needs. How exactly can leasing equipment provide these benefits? Let’s review.

Minimal Upfront Costs

Unlike equipment purchases, you can lower your upfront costs when you lease, freeing up your budget so you can focus on your lab’s research.

If you opt to purchase lab equipment, you will end up eating all of the equipment costs the moment you issue your purchase order (PO), in addition to the fees for installation, training, service contracts, shipping, and sales tax assessed on all of the aforementioned expenditures.

Working with a leasing company like Excedr can reduce these upfront costs by an average of 95%+ to minimize any financial strain that impedes the progress of your research and offers competitive interest rates.

In most instances, we require just two monthly lease payments as security deposit to get access to best-in-class equipment. This preserves your working capital so you can reinvest in business development and operations, such as:

  • Locking in strategic Pharma and biotechnology partnerships
  • Securing licensing deals
  • Generating additional revenue streams
  • Hiring brilliant PhD scientists
  • Purchasing mission-critical consumables

Predictable Monthly Payments

Excedr’s monthly payments remain affordably fixed throughout your lease term and can typically be customized based on the needs of your lab (cash flow, budgeting, grant cycles, or any seasonal fluctuations).

In contrast, purchasing lab equipment leads to unexpected expenses due to rising annual service contract costs or exorbitant “time and material” repair/maintenance bills. 

Additionally, Excedr can leverage its vast financial and vendor network to keep prices low while offering the widest selection of lab equipment to meet your lab’s specific requirements. You’ll never have to worry about hidden fees or wild fluctuations in price due to volatile financial markets when working with us.

Reach Your Milestones Faster

Excedr’s unique underwriting process allows our clients to hit the ground running. Imagine how much faster your laboratory could introduce key innovations to the world without sluggish financial markets and their grueling, lengthy underwriting procedures holding you back. 

Our lessees enjoy a swift approval process that typically takes between one and three days, with typically less burdensome documentation requirements than other financing options. Our goal is to speed you up, not slow you down.

Increased Credit Capacity & Company Value

Maintaining cash on hand and access to credit is essential when surprise expenses crop up in the lab—or when you need to seize a business opportunity to further your research. When you choose our lease program, you won’t have to worry about increased debt-to-equity ratios or cash being tied up in rapidly depreciating assets. 

In other words, you will not negatively affect your ability to borrow or fundraise in the future when leasing with Excedr.

Comprehensive Repair & Maintenance Coverage

There’s nothing worse than grinding for months on end through a lengthy study, only to watch your key instruments sputter and fail at the most pivotal moments. Equipment downtime can cause indefinite delays and require a hefty sum of money to fix. You don’t want maintenance costs to add up. It’s one of the more common unexpected costs for businesses with labs.

Our equipment lease program includes comprehensive corrective repair coverage to keep experiments running smoothly from start to finish. We also offer annual preventative maintenance coverage to prevent breakdowns from occurring in the first place.

Flexible End of Lease Options

Growing a business requires flexibility, because as you grow, your operational and financial needs shift proportionally to your scale. Excedr’s leasing contracts provide you with the opportunity to choose the best equipment to meet your needs right now, while offering the flexibility to upgrade to newer instruments when your research calls for it at a later date.

At the end of the lease, you can choose whether you’d like to renew or end the contract. You also have a purchase option available as well. The price will be determined using the fair market value of the leased equipment, which represents the asset’s then-current worth.

Tax Advantages

The IRS currently considers operating leases a tax-deductible overhead expense — NOT a purchase. This is great news for the lab. Instead of paying for equipment with after-tax profits, you can use your pre-tax dollars, saving a significant amount of cash.

Parting Thoughts: Buying Isn’t Your Only Option

Buying business equipment can lead to significant cash crunches. Limiting your budget by purchasing fixed assets doesn’t always make sense, despite the benefits of ownership, whether it’s office equipment, heavy equipment, or laboratory instruments.

Our leasing program provides small business owners and startup founders with access to specialized, high-quality equipment of your choice, with white-glove freight and installation, comprehensive technical training, and a full suite of ongoing services.

The benefits of Excedr’s operating leases (also called fair market value leases) go beyond just getting equipment in the lab—they help you create financial flexibility and stability within your organization. This is critical if your startup is in the early-stages of development, as the overall cost of leasing can often help you achieve short-term and long-term goals more easily.

Related Articles:

Operating Lease vs. Capital Lease: What’s the Difference

A Guide to Operating Leases

Equipment Leasing vs. Financing

How to Make the Best Decision About Buying Used Equipment

Founder’s Guide to Extending Cash Runway

What Types of Equipment Leases Are There?