Applying the right financial acquisition option for any major investment could have a direct impact on the profitability of your business. When considering any major investment, undergoing an acquisition alternative analysis should be a part of the discussion. It is imperative to understand both the risks and rewards of each option based on your specific needs. One area to consider in acquiring equipment is the decision whether to purchase or to lease that equipment.
First, we must define a few basic principles regarding capital versus expense funding. Capital funds are funds used to acquire assets that will be owned by the company. Capitalized assets are depreciated over a pre-defined period of time that results in an expense until the asset is fully depreciated. An ideal capital purchase will have a book value (purchase price – depreciation costs) equal to or less than the fair market value (open market value for the used asset). Lastly, capital equipment does have a property tax based on book value with a minimum ongoing amount even after fully depreciated.
Expense funds are funds used to pay for business operations, including rentals and operating leases. Typically, the only additional costs incurred with expense funds are the upfront sales taxes incurred on a specific schedule of the rental terms.
When doing a buy versus rent analysis it is best to start with reviewing the key factors that should be part of your analysis:.
What will your usage be?
You must evaluate what the frequency of use will be versus the durability of the investment.
You must also consider the duration of your needs versus the expected depreciation schedule of the investment. Will this investment stand the test of time and will this investment still meet my needs in a few years?
What is the cost of ownership versus the rental expense?
When evaluating a buy versus rental comparison you must evaluate the cost of ownership versus the rental expenditure. The two major expenses that come with ownership include depreciation and maintenance. Depreciation is a given cost of ownership but it must be compared to the obsolescence rate of the item. Investing in a product that has a shorter life span than the depreciation rate would not be a good investment. The second factor to consider is the maintenance expenses and downtime you may incur.
WHEN TO BUY
With all this being said… what are the ideal conditions to purchase?
Based on your usage and duration requirements, you should consider buying if your need is long-term (three years or longer). In this instance, it would be safe to assume the estimated usage rate will be greater than 60% of the time. Additionally, if you can determine the item’s obsolesce rate is slower than its depreciation rate.
You should also consider buying when the cost of ownership is less than the cost to rent. Is the cost of maintenance relatively low? Are you confident the failure rate is low and will not need to be sent out for repairs? Will this product be relevant past the depreciation cycle? If you can answer yes to these questions then this is an ideal item for capital purchase.
WHEN NOT TO BUY
When determining whether or not to buy, the main factor to consider is the return on your investment, or ROI. The ROI is a ratio of earnings against the capital invested.
The other consideration is the availability of funds. Many companies do not have the upfront funding to make large purchases outright. In some instances, these companies also may not be able to obtain the credit to make up for the lack of cash. New equipment purchases have a longer lead time than rentals. There may be additional costs associated with a purchase that is usually included within the cost of a rental such as:
- Calibration costs.
In the case of downtime, rentals have a distinct advantage in that comparable (e.g. “loaner”) might be used if the original item is not in working order.
Another practical consideration to keep in mind is that departmental-level budgets often have fixed capital vs. expensed line items. Equipment purchase vs lease decisions are best made with intended type and duration of usage in mind. Sometimes it may be necessary to request a different mix of capital vs expense budget in order to make the best decision in equipment acquisition.
When considering using capital versus expense funding you must evaluate all factors. It is a fine balancing act and just a few factors can really tip the scale in one direction or the other.
WE CAN HELP
Electro Rent is unique in the industry by the fact that it offers a variety of acquisition options from a number of the top test and measurement vendors. We offer high-performance test equipment for sale, lease and rental. We offer a broad selection of new and used equipment as well as flexible financing and rental terms to meet your needs and budget.