ALEXANDRA LOPEZ-PACHECO
If you are in the market for new equipment and are not sure whether it makes more sense to buy or lease, you are not alone. There’s no easy answer, says Simon Parker, director of the Ivey School of Business’s Driving Growth Through Entrepreneurship & Innovation Cross-Enterprise Leadership Research Centre.
“It’s a complex trade off,” he says. “When you’re buying, that’s a sunk investment. If things go wrong, or your business goes badly, you can’t get much of that investment back. At most, you might be able to sell some of that equipment and get some second-hand value for it.”
So if you are worried about uncertainties in the economy, or challenges and threats specific to your market, “leasing gives you more flexibility,” Mr. Parker says.
“In the short run, if you’re very uncertain about your trading environment and the survival of your firm, you might very well be looking at leasing, which is usually the more expensive option in the long run but it avoids this big sunk problem if you end up not succeeding. Some markets aren’t as competitive as others and in those sorts of cases you could be paying quite a high price for that flexibility. Everything has a high price: money has a price, it’s called the interest rate. Flexibility has a price: sometimes it’s high cost,” he says.
Even if you have a well-capitalized business in a sector that is relatively immune to the current uncertainties in the economy and you have a strong, loyal client base with lucrative opportunities for growth at your fingertips, buying — usually less expensive long term — isn’t necessarily the best option, Mr. Parker says.
“It depends on the kind of equipment you’re looking to buy,” he says. “Take computers. We all know how frequently we have to update our machines. It seems like every two years we need a new laptop or desktop because software is constantly improving and that puts continued demands on hardware. Do we want to be stuck with late 1990s machines? It’s going to be very hard to do business in 2010 using obsolete equipment. So, with the kinds of equipment that technology changes rapidly, you’d probably expect a greater tendency to lease even among well-capitalized firms.”
However, you also have to consider what Mr. Parker describes as the familiarity cost if you lease the equipment. “It takes people a while to get to know the equipment and to master it and to really use it to its full potential,” he says. “If you buy you’re more likely to be sticking with your equipment longer. That economizes on all sorts of set up costs you might get with leasing. But then there’s the familiarity cost. It’s not so much of an issue with something like a photocopier because typically those are things that are fairly generic, but with more specialized types of equipment a downside to leasing could be the familiarity cost if the equipment keeps getting replaced and upgraded and that might not be fully under your control; it might be more under control of the leasing company.”