Leasing vs Buying: A Guide to Strategic Decision-Making - Nomos One (2024)

Leasing and buying are two common ways organisations across various industries acquire assets.

Educational institutions often lease facilities and technology, such as computers and printers. Healthcare providers lease medical equipment, such as MRI machines, CT scanners and other laboratory equipment, and utility companies may lease land, power generators and transmission lines. This allows organisations to access the latest technology, meet the changing needs of their customers, and expand their capacity quickly and efficiently without having to make a large capital investment upfront.

Other businesses may opt to buy assets, especially if they intend to use them for a long time without replacing them, or if they have the necessary funds.

Leasing vs buying depends on a variety of factors, such as its financial situation, industry, and growth plans. Whether to lease or buy assets is a strategic decision that can significantly impact a company's financial performance. While there are no one-size-fits-all answers, there are several factors that companies should consider when making this decision, including the type of asset, its intended use, the length of time the asset will be used, the company's budget and financial goals, and its risk tolerance.

Below is a comprehensive overview of leasing vs buying, discussing the key differences between the two and offering guidance to businesses on how to make the best decision for their specific needs.

Leasing vs. Buying

What is leasing?

Leasing is a financing arrangement in which a company rents an asset from a lessor for a fixed period. When you lease an asset, you make regular payments to the lessor for that period. At the end of the lease term, you can return the asset to the lessor, purchase it at a predetermined price, or renew the lease.

What is buying?

Buying an asset is the process of acquiring full ownership through a lump-sum payment or financing. When you buy an asset, you make a one-time payment to the seller and become the owner of the asset. You are responsible for all maintenance and repairs and can keep the asset for as long as you want.

The advantages of buying

• Equity. The company owns the asset outright.
• No early termination fees. The company can sell the asset at any time without penalty.
• No mileage restrictions. The company can use the asset as much or as little as it needs.

The disadvantages of buying

• Higher upfront costs. Buying an asset typically requires a larger upfront payment than leasing.
• Maintenance and repairs. The company is responsible for all asset maintenance and repairs.
• Risk of obsolescence. The asset may become obsolete over time, which can reduce its value.

How to choose between leasing vs buying

The best way to make the leasing vs buying decision is to take into consideration the following factors:

• Financial situation. How much upfront capital can you afford to spend on an asset? Does your company have the cash flow to make lease payments? Leasing can be a good option for companies with limited upfront capital. Buying an asset can require a large down payment, which can tie up cash flow.
• Industry. Are there any specific benefits to leasing or buying in your industry? For example, some industries, such as technology and transportation, benefit from leasing because it allows companies to upgrade to the latest equipment easily.

Other factors to consider

There are a few other factors that might need to be evaluated to make the best decision:

• Lease terms. It is important to carefully review the terms of any lease agreement before signing it. This includes understanding the lease term, the monthly payments, and any additional fees that may be charged.
• Maintenance and repairs. Some lease agreements require the lessee to be responsible for maintenance and repairs. Other lease agreements include maintenance and repairs in the monthly lease payments. Understanding who is responsible for maintenance and repairs under the lease agreement is important.
• Purchase option. Some lease agreements include a purchase option, which gives the lessee the right to purchase the asset at the end of the lease term for a predetermined price. When deciding whether to lease or buy, it is important to consider whether you want to purchase the asset at the end of the lease term.