Lease it or Buy it? - Pro’s and Con’s for Business Owners.
In the professional spa business, one of the greatest challenges is keeping up with the times. As styles and fashion change spa décor and the services offered must change also. To remain competitive in today’s spa business it is of the utmost importance to keep updating your spa equipment to survive.
Attend any spa and medical show, or read any spa literature these days and you will be over whelmed with innovative and exciting spa and medical equipment that is being offered. The costs associated with the purchase of this equipment can be overwhelming to a business owner. There are many factors for spa owners to consider in determining when to buy or to lease equipment.
One of the most important factors is to look at your overall business plan. The business plan should make provisions for what type of services and expansion you will need for the next five to ten years. An important factor is the estimated cost of the equipment needed to stay competitive. How do we pay for this needed equipment? Most companies put all their cash resources back into the business’s overhead enabling it to thrive. Using cash or valuable bank lines of credit are usually essential for financing daily or short-term business needs i.e. paying suppliers, meeting payroll, or dealing with any business emergency. Most business owners would prefer to buy than lease provided they have excess cash on hand. Bank lines of credit or cash on hand are not the only answers for funding long-term assets such as spa equipment. Even so using these purchase options for your spa equipment is not always the wisest financial business choice.
To lease … or not to lease. That’s an issue business owners often face. If you are weighing the pros and cons of leasing versus buying that newest piece of spa equipment, there are several important facts to keep in mind.
Evaluating costs is more complicated than just comparing the lease amount versus the cash purchase price of the equipment. The best option for the spa owner will be determined once the overall cost and the actual lease payments are evaluated. You should break down the lease payment weekly then daily to compute how many services it actually takes before you can pay the lease payment and generate a profit. The proceeds generated from the productivity of the new equipment should be greater then the payment. This lease payment is a fixed monthly cost, which should be easier to budget than a large cash outlay. Purchasing the equipment outright negatively alters your available cash flow. This is a key factor when deciding to lease or pay cash for your equipment.
Unfortunately, new technology and specialized equipment becomes obsolete quickly. New equipment should definitely increase efficiency for your staff; lower operating costs and ultimately increasing profits. Buying this equipment makes no economical sense if the average life of the equipment less than five years. Leasing is a better option if your use is short-term.
Cash is better alternative when you receive an upfront discount on the purchase price of the equipment. If and when a significant cash savings will be realized, is an important option for you to consider. In this case it would make sense to pay cash rather than lease. Another example of cash being beneficial for the purchase of new spa equipment is when the net present value of your cash on hand is earning you a sufficient percentage amount of interest in savings or investments. If the purchase of new equipment increases cash flow and profits in the spa, you must compute the profits and see if this overall earned income is higher then what your cash would have earned while being invested. If the profits are higher than this would be an ideal situation where you would want to pay cash rather then lease. Since most businesses do not have large sums of money available for large equipment purchases leasing has become a popular financial option.
If you own your equipment in your spa facility, you will generally be entitled to a depreciation tax deduction (or a first year write off under code section 179). Thanks to recent tax law changes, this year’s new equipment purchases may be eligible for bonus depreciation deductions. When you lease equipment, your payments are tax deductible. Before you consider leasing or buying new spa equipment consult your accountant or financial advisor to determine what option would benefit your business needs at this time.
In closing there is one very important factor that many financial advisors and accountants have preached to business owners for years: “If the new equipment appreciates in value buy it. If the equipment depreciates in value lease it.”
By: Jeff Grissler
Quest Resources
