Leasing vs. Buying Equipment: The Benefits of Equipment Leases
Last updated on March 7, 2023 by
Deciding whether to lease or buy equipment is a topic of ongoing debate, especially for companies in capital-intensive industries. CEOs, CFOs, managers, and anyone deciding to procure new machinery will want to ensure they choose the best option for their business.
The simplest way to determine whether or not leasing equipment or buying is best for you will be to consider your financial position. What are your budget, financial strategy, and equipment needs? Having a clear idea of what you can afford and need will help you decide to lease or buy equipment.
However, in today’s uncertain economic climate, businesses focus on cutting costs and enhancing their cash flow more and more. For companies planning to purchase or upgrade equipment in the near future, leasing might be a more practical alternative to buying.
Both buying and leasing have their advantages and disadvantages. That said, while leasing might be more costly over the equipment’s lifespan than outright buying, it is frequently a more cost-effective solution.
This is because leasing can help you preserve capital, manage cash flow more efficiently, and keep business lines of credit open for other areas of business development.
As you seek to minimize expenses and plan for the future, consider the pros and cons of leasing vs. buying. This article will examine the benefits and leasing and the advantages and disadvantages of buying lab equipment, starting with leasing.
The Benefits of Leasing Lab Equipment
Whether you are a startup founder, small business owner, or lab manager, your ultimate goal is for your company to succeed. It’s essential to equip your lab with the appropriate instrumentation, maintain the equipment properly, and focus on maintaining healthy cash flows from one quarter to the next to create an environment conducive to growth.
This becomes even more critical when financial markets become tight, and you need to have a cushion of cash on hand for unforeseen opportunities or emergencies.
Unfortunately, conventional procurement methods for lab equipment can quickly deplete cash balances or necessitate founders to pledge personal assets and collateral to secure credit lines. This can lead scientists to focus more on reducing expenses to stay afloat rather than investing in operations to make their next breakthrough in the lab.
Instead of relying on traditional procurement methods that do not suit your financial situation, consider utilizing cost-effective and founder-friendly leasing agreements that provide your business with the necessary technology.
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
Access to Cutting-Edge Equipment
It can be argued that when you purchase equipment, you limit your access to the technology of that specific period. While this may be a minor concern for basic machines or office furnishings, it can significantly impact your organization’s performance if it is crucial to stay up-to-date with the latest technology.
Leasing equipment offers a more flexible solution, allowing for upgrades to newer, more relevant products as needed, eliminating the need to sell existing equipment. Because you’re not stuck with a piece of equipment that will become obsolete, you can more easily upgrade to the next available option while retaining what you already have.
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.
Easier Financing & Underwriting Process
When attempting to secure financing for a significant equipment purchase, your lender will likely require you to submit several years of financial history. Banks tend to be quite rigorous in their underwriting process.
You may only have a few years of financial history, or your financial history may not meet the bank’s strict standards. Leasing can present a more viable option if your company is less established or already using most of its credit capacity.
Leasing companies generally require less documentation to approve an equipment lease. In some cases, the company may only require six months to a year of credit history, which is much less than a traditional loan. The leasing process is usually faster and more straightforward than the equipment loan process.
Excedr’s quick underwriting process gets the equipment you need into the lab much more quickly, helping you hit the ground running or keep up your current pace of research.
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.
Reduced Maintenance & Repair Costs
There’s nothing worse than grinding for months 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.
Leasing equipment can save money during the acquisition process and lead to a reduction in maintenance costs. In most cases, the equipment vendor assumes maintenance responsibilities as part of the lease, which can help prevent unexpected expenses if the equipment malfunctions. Additionally, this eliminates the need for a large emergency fund to cover unforeseen maintenance costs.
Another valuable yet often overlooked benefit is that your team no longer has to spend time planning and managing maintenance, allowing your scientists and managers to focus on more critical matters.
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.
Potential 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.
The Drawbacks of 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.
Lease Your Lab Equipment & Experience the Benefits
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.
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