This special blog post comes to you from Eddie Larraga at Intellicom. Eddie is our Financial Manager and possesses a wealth of knowledge that helps Intellicom make solid business decisions. It seems like Eddie has a spreadsheet or formula for everything! When I asked Eddie what he would like to blog about, he replied that he would like to help educate our customers on how to perform the analysis on whether to buy equipment or lease equipment. So without further delay, here you go!
Imagine that you have made the decision to purchase the new superfast, superefficient, Super Server 9000. Now, all you have to decide is how you want to finance the equipment. Will you choose to lease or buy? To begin the decision making process, it is best to start with a lease vs. buy analysis and measure the costs and the value of the decision. Once the analysis is complete and you can see the financial impact the decision will have on the company, the next step would be to weigh certain factors such as cash flow constraints, flexibility, and risk and include this in the analysis.
So which decision is best for your company, is it the lump sum of cash upfront, or is it a spread payment option? The answer is simple; you can’t possibly know until you complete a lease vs. buy analysis and weigh all the factors.
Below is a very simple lease vs. buy analysis based on some fictional numbers. This should illustrate to you the amount of detail that should go into making this kind of decision. In the example below, the analysis would show that in this case there would be a clear advantage to owning the equipment. Keep in mind; there are a lot of factors that can influence this decision, the rate and length of the loan, current cash position of your company, and the residual value of the item being purchased, etc.

Sample Lease vs Buy Analysis
I also thought it might help to give a simple definition of terms
Leasing: The first thing that probably comes to mind when you hear the word lease is monthly payments. There are a variety of lease structures, but the two most common types when purchasing equipment are operating lease and capital lease.
The operating lease is simply month-to-month payments on the equipment. The leasing company will actually own the equipment, and you are paying to use it, just like renting. Because operating leases are not fully amortized, at the end of the lease contract you will have one of three options; continue to lease the equipment, return the equipment, or purchase the equipment for a specified amount; anywhere from 5% to 25% of the original purchase price.
The second type of lease, a capital lease, also has a monthly payment option. The payments are usually a higher dollar amount than the operating lease, because you own the equipment and are actually paying it off with the leasing company. Since you own the equipment, you will be depreciating it on the company’s accounting books at a specified rate (speak to your CPA for current tax laws).
Owning: The buy definition is straightforward; you either have the cash on hand or the bank will lend you the money and you will pay for the equipment straight out. The only thing you have to do is depreciate the equipment on your books.
Hopefully, you can see that there is a science behind how a lease vs. buy decision is made. It is much better to make this magnitude of a decision based on the facts rather than gut feeling. If you are faced with a buying decision around investing in technology, Intellicom would be happy to help you with this analysis.