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When Should a Small Business Rent vs. Buy?

“Should I rent or should I buy?” It’s a question you typically think of when considering buying a car, home or RV. But be prepared to ask yourself this question frequently as a small business owner, too.

The question of whether to rent or buy might pertain to your office space, but it can also deal with company vehicles, manufacturing equipment and much more.

The following are some pros and cons of renting/leasing versus buying, as well as a few specific areas that small businesses typically should consider.

Pros and Cons of Renting/Leasing

Leasing typically is a smart decision for companies that either don’t have a lot of cash on hand, or want to test something out before committing a lot of money to a purchase. For instance, office-space leases certainly make sense for most small businesses that simply don’t have the capital to buy their own buildings/facilities. You also might consider leasing out expensive manufacturing equipment to prove its worth before plunking down cash to buy it outright.

That said, leasing typically will end up being more expensive than buying if you lease long-term. There also are tax implications – you can’t deduct depreciation of anything you lease from your taxes, though payments for certain assets themselves may be deductible.

Pros and Cons of Buying

The obvious pro of buying an asset is that, once you do, you own it outright, which means you can do with it as you please. It’s typically cheaper to buy over time, and you do have the benefit of depreciation when it comes time to do your taxes.

But the downsides are just as obvious. You typically must have a large pile of cash at the ready (or take on a significant amount of debt), and once you’ve bought it, you’ve bought it – and it’s much more difficult to unload a purchased asset that you’re unhappy with.

A Few Specifics

Here are a few types of assets that you’ll likely need to make a “rent or buy” decision on:

  • Real estate: Whether it’s manufacturing facilities or office space, there are numerous variables to consider when making a decision to buy or lease that space. Sure, leasing might save you money up front, but low interest rates could yield fantastic longer-term savings. Buying also gives you a sense of stability, including fixed overhead – it’s nice to not have that annual looming question mark about how much rents will be hiked. But you also have to ask yourself how much you want to deal with landlord duties such as maintenance or tax issues.
  • Work/office equipment: Most of the decisions you make about whether to purchase or rent equipment will come down to simple considerations, such as how much cash you have available at the time, and how often you’ll use the equipment in question. For instance, a couple of computers or a printer for the office are relatively low-cost items that you’ll frequently use, and that you can easily move if you eventually switch locations. But large-scale equipment like what’s used in manufacturing or construction can be extremely expensive to purchase outright – leasing, which also usually includes maintenance for the equipment, might be a better solution.
  • Employees: Yes, you technically do not buy or lease employees, but the ways to bring on help are extremely similar, and the buys/cons are much like what you must consider in renting versus purchasing. For instance, freelancers and contractors can save you a little money and allow you to test out workers on a short-term basis. But hiring full-time employees, while more expensive (especially once you start offering benefits), typically is a path to better-skilled workers who will be more dedicated to your small business’ mission.

Whether you should rent or buy is a complex question that can have serious financial ramifications. Translation: Don’t go it alone. McManamon & Co. offers a wide range of consulting services, and our business experts can help you determine the benefits and pitfalls of any buy-or-lease situation – including the consequences on your taxes. Call us at 440.892.9088 or contact us online to discuss these important financial decisions.

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