Lease or Buy? Credit or Cash?
I am curious what portion of people's equipment purchases are lease vs. buy. My studio is about to undergo a major upgrade across the board (varying in cost from workstations to higher end systems and storage), and I am weighing the pros/cons of each, including the benefits of using (for purchases) financing vs. buying outright. Obviously financing frees up capital for cash flow etc., but we started our business with zero outside funding, have never financed anything for the business and enjoy our 100% ownership.
Anyone have some input on this issue?
We lease for accounting and tax purposes. With leasing, you don't have to amortize and it's a direct deduction. The person you should be asking is your CPA. We get interest free leases from Apple whenever we buy a new edit system. I have a great Apple rep. We do it over the phone in two days and my accountant loves it. The problem that some have is when the interest rate on the lease is as high as on a loan. The thing to do is add up everything it costs from the down payment to the last payment and see what it totals. We try to stay away from business loans unless they are 90 days or more, same as cash and a job or two pays for it.
It's a dry heat!
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I started out leasing, but found that the equipment depreciated so fast that it's better for me to purchase the equipment, then sell it off in about two years. We use financing for equipment where it's prudent, such as an HD deck. But for the most part, we try to purchase the equipment outright.
Steve is absolutely correct about the CPA. Talk to that person before you do anything. Lay out everything you want to do and how much money you expect to spend. They will give you the best advice for your situation as to what you should purchase and what might be better to finance. Just like Steve, we have a great CPA that has been helping us since we opened the shop.
Walter Biscardi, Jr.
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I used to lease in the 90's...it was useful when sudden growth outran immediate cash resources.
In the long run however, the equipment asset value simply drops so much faster than the liability does, it makes an automobile look like a good investment. Leasing companies eventually figured this out and it's unlikely you could get a lease term beyond 24 months for video equipment, and I'd be surprised if you could even finance computer equipment THAT long.
Keep in mind that tax law, if really tested in an audit, only allows you to expense a lease that allows for a residual "fair value". in other words, if you want to buy the item at the end of the term, the price would be based on what that item's market value is...any lease with a fixed buyout price (a $ 1.00 buyout at the end of the lease was a popular in the early 90's considered a purchase as the price is agreed on ahead of time. A few I know ended up paying out back income tax on money they spent on a lease that was later determined to be buying an asset and depending on how a depreciation table is calculated after the fact (depreciation is how you expense capital equipment you 'own'), there could be additional tax due as the lease payments would have been declassified as straight expense, not to mention fines and interest.
These days it just seems smarter to buy or rent. Anything you use 2 days a week should probably be purchased...anything you need once every two weeks can most likely be rented unless the income you derive from it will pay for it in a year or less.
Also...renting to begin with is a healthy way to understand what you should be charging. Too many people end up buying gear that they're able to stretch and pay for, but their income stream doesn't justify. It's nice to have the best gear...but I like to eat a steak once in a while too.
I've been turning my production laptop every 18 to 24 months (mostly because i simply burn them up that fast) and the way the technology is moving, I just don't see much practicality in leasing that equipment.
I think most of us who are independent are best off owning a relatively inexpensive camera (like an HVX200 or an XL-H1 or a V1...) and renting whatever else we need for any given project unless you need one particular high end camera 2-3 days every week for a specific client. And even then, I'd want a signed contract before I was willing to lay out anything north of 20,000 USD for a piece of gear.
If you suddenly need gear and don't have the cash (who does?), sometimes completely unconventional financing is in order...I've had clients who have agreed to provide a downpayment that covers some piece of gear that needs to be acquired to complete their project.
...some ideas anyway.
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