When starting a business, you’ll likely need to acquire physical assets. You may need an office space where you and your teammates can meet up and do work. You may need factory equipment to produce your core products. Or you may need a heavy-duty truck to transport goods from one place to another.
For each of these options, you’ll be faced with an important decision: should you buy, rent, or lease?
Buying vs. Renting vs. Leasing
Let’s start with a basic definition of each of these options.
Buying is putting forth your own money to acquire the asset in question. After the purchase, you’ll own the asset outright, meaning you can do whatever you want with it; you can even sell it at some point in the future. If you don’t have the money to afford the full purchase price right away, you may be able to get a loan to cover the difference.
Leasing and renting are very similar. In both leasing and renting, you won’t own the asset directly. Instead, you’ll have access to it, able to use it as stipulated in your agreement. In return, you’ll pay a set rate (usually a monthly fee) to continue using it.
The biggest difference between renting and leasing is the length and details of the agreement. A lease agreement usually lasts a year or longer and is more concrete. A rental agreement may be month-to-month and may afford more flexibility.
Advantages of Buying
Buying an asset for your business gives you a number of advantages over renting or leasing, including:
- Ownership and control. To start, buying an asset gives you full ownership and control over that asset. If you lease a vehicle, you may be contractually obligated to stay within a certain mileage, or you may be unable to customize that vehicle. But if you fully own the vehicle, nobody can stop you from doing whatever you want with it.
- No terms or contracts. Buying means you’re not going to be bound by any terms or contracts. You won’t have to renew on a regular basis, and you’re not going to be “locked in” to a certain period of use.
- Resale. Whenever you’re done with the asset, or if you find you no longer need it, you can resell it. Depending on the nature of the asset, you might be able to recoup most of your initial costs—or even make a profit. You can’t sell an asset you’re renting or leasing.
Advantages of Leasing/Renting
However, there are some great advantages to leasing and renting as well:
- Options for low capital. If you don’t have access to much capital, you may not be able to afford a direct purchase. Leasing or renting allows you to get access to assets you’d otherwise never be able to obtain.
- Avoiding a loan. An alternative option for businesses with minimal cash is to get a loan, but loans can also be problematic; they can be burdensome and decrease your credit availability. Leasing or renting gives you many of the same advantages as a loan, but without the looming debt.
- Mitigating responsibility. Generally, when you lease or rent an asset, the owner will be responsible for things like repair and maintenance—and sometimes, they’ll replace the asset or upgrade it periodically.
- Addressing temporary needs. Leasing and renting are often better short-term options. If you have temporary needs, or if you know you’re not going to use this asset for an extended period of time, one of these agreements may be better than an outright purchase.
Factors to Consider
Before you make your decision, consider the following:
- Your needs. First, think about why you need this asset. Is this something your company is going to use for the next several years, or something you’ll need for just a few months? Are you certain this is the best asset for the job, or are you just experimenting currently?
- Access to cash. Next, think about how much cash you have on hand. If you have enough money to purchase the asset outright, or if you at least have enough for a down payment, you may consider a purchase more strongly.
- Need for control. How much control do you need to exert with regard to this asset? Do you want to be able to customize or alter this asset? How much flexibility do you need?
- Repairs and maintenance. Are you able to conduct your own repairs, maintenance, or upgrades? Or would you prefer someone else to do it?
Buying, renting, and leasing all have their unique advantages, so there isn’t a single clear answer for the “best” business option. Instead, you’ll have to weigh your options carefully, consider your unique situation, and make the best call for your business.