The biggest hurdle new business owners face is acquiring crucial assets. In the case of a print shop, it’s investing in printing equipment to start printing custom garments tailored to your customers’ needs. Whether you’re starting from scratch or have an established company looking to expand, deciding to acquire equipment is no straightforward task. You’d have to consider a wide range of variables, including:
- How long will you use the equipment?
- Is there a need for the equipment?
- Can you sell the equipment once you no longer need it?
- Will the tech be deemed obsolete in the near future?
You must look at the bigger picture before getting the necessary equipment. After all, how can you turn things around if you make a bad call? What if you can’t sell it off? Considering leasing or buying equipment hinges on the nature of the equipment itself, not only on how it’ll benefit your business but also on how the garment printing landscape can change as innovations roll out over time.
What is Leasing?
Unfamiliar with what leasing is? A lease is a contractual agreement between two parties. It stipulates that you, the lessee, wish to rent equipment owned by a person, company, or entity (the lessor) for a specified period. In return, you’ll pay a fixed sum to the lessor to use the equipment for the duration of the contract.
A lease also indicates that any party that breaks the lease will be subject to consequences, including a negative remark on the lessee’s credit score or even a lawsuit against the party that breached the lease’s terms. Some stipulations allow a party to terminate the lease earlier as long as it’s negotiated with the other party without any negative consequences.
Before signing a lease, you may need to undergo a credit check. This ensures you can repay your financial obligations once you take on the lease.
Since you’re renting the equipment from someone else to use it for your business, you don’t own said equipment. However, it’s much cheaper to lease equipment than buy it since you only pay a fixed amount every month until the end of the contract. It does add up to an amount higher than the equipment’s actual market value, but you’re still getting the most out of the use of the equipment.
Some leases also offer you choices on what to do next: you could either renew the lease and keep using the machine, start a new one for newer, better equipment, or buy the equipment you were using for a specified sum (known as a lease-to-own agreement). For that last scenario, you may need to pay whatever remaining balance of the equipment’s price to gain ownership. These will depend based on the lease agreement.
Note that leasing and financing are very different concepts. Equipment financing essentially involves taking out a loan to purchase equipment, then repaying that loan over time at a fixed amount over a specific loan term/schedule. Once you’ve finished repaying the loan, the equipment is yours. In the case of leasing, once the lease contract expires, you still don’t own the equipment. It remains in the lessor’s ownership unless both parties have signed a lease-to-own agreement.
Why Should You Lease Equipment?
Leasing equipment has plenty of benefits, especially if you’re starting your first printing business.
Preserve Cash Flow
Of particular importance to new business owners, leasing offers a flexible way to keep your cash flow going without taking a massive dent in purchasing equipment. Leasing is the most cost-effective solution to getting the required equipment without spending your entire budget, which also means getting the necessary equipment and making money with them.
A common pitfall new shop owners go through is the misconception that they can achieve their ROI within a few weeks or months once they own the necessary equipment. Without proper cash flow management, however, any purchasing decision might end up becoming the worst decision someone could ever make. And if the equipment does not contribute much to the shop’s growth, that’s another major setback.
With leasing, you won’t need a considerable upfront cost to invest in the right equipment. You’ll be able to set aside a sum for the monthly lease payments without draining your business’ finances. Not only that, the lease covers not only the use of the equipment itself but also factors in regular maintenance cycles. This usually means the lessor will arrange for a third party to maintain the equipment regularly. As a result, you’ll save a significant amount on maintenance bills.
Overall, leasing helps you retain sufficient working capital for your shop’s daily operations, allowing you to focus on your overheads, labor arrangements, supplies, and many other crucial aspects.
Fixed Payments
The benefit of paying fixed amounts throughout the contract is in line with keeping your cash flow positive. They’re much more flexible and cost-effective than taking out a loan. Of particular importance is that payments for a lease are based on fixed-rate financing: the payments you make won’t change in amount even as interest rates and taxes increase over time. In the case of a typical loan, however, interest rate changes will also alter the payment amount.
Moreover, a loan may usually require a sizeable down payment for taking on a loan, while a lease doesn’t need a down payment. You’ll usually be required to make the first lease payment upon signing the lease and possibly some additional extraneous costs, such as shipping the equipment to your shop.
Another benefit is that, since you’re paying a fixed sum over a fixed term, you’ll have one less item to worry about where budget projections are concerned.
Obsolescence
Imagine purchasing new equipment to fulfill the shop’s needs, only to discover later that it’s been made obsolete by a new release that can do far more than your newly acquired equipment can. If you’d spent top dollar acquiring this equipment, that’s a lost investment. Selling it would also be difficult, especially if other shops aim to get their hands on that fancy new tech.
With leasing, you won’t need to worry about such a scenario. Some leases may be for a short duration, so even if the equipment you’re using goes obsolete, once the lease ends, you can lease newer equipment to replace the one you used. Other leases might allow you to trade the current (now obsolete) equipment for something newer. After all, you’re paying to use the equipment, not to own it.
Leasing Options
Leasing comes in various flavors, giving you several options for leasing equipment. We’ve already mentioned that you could take up a lease-to-own agreement, where you can buy the equipment you’re leasing at the end of the contract, usually equal to the remaining balance of the equipment after deducting all the lease payments you’ve made thus far. There may also be leases where the lease may be listed either as a business asset or otherwise, allowing you to take advantage of specific tax benefits.
Some of these leases offer attractive benefits you can leverage for your business. Note that they also come with caveats, so be sure to speak with the lessor before you pick one.
Tax Incentives
Depending on the kind of lease agreement you’ve signed, you could potentially deduct your fixed payments as a business expense, thanks to Section 179 of the US Internal Revenue Code. If it falls under qualified financing deductions, you can make the necessary claims and enjoy the tax relief it provides. Just make sure you speak to a licensed tax consultant before doing so to understand what you can and can’t do for a tax break.
The Cons of Leasing
More Expensive Over Time
As the fixed payments you’re making include interest rates at the time the contract was made, the overall sum paid will exceed the actual cost of the equipment you’re using. For example, if your monthly payments cost your shop $200 for a contract period of four years, that’s a total of $9,600 paid. If the equipment’s actual cost was only $6,000, an additional $3,600 goes into the lease. That $3,600 could have been retained in your overall cash flow and used for something else.
Contractually Obligated
Once you sign a lease, you must complete its tenure before taking up a new one. However, if a new product comes out that renders your current equipment useless, you’re stuck with it until the lease contract comes to an end. If you decide to terminate the contract early, remember that leases come with clauses with heavy penalties or other consequences that could harm your shop. You might end up with a court case falling into your lap!
Why Should You Buy Equipment?
On the other hand, purchasing equipment outright does have its share of pros for your consideration, too.
Complete Ownership
If your shop is doing well for itself and you have the budget to acquire equipment for its needs, buying becomes an obvious choice. You won’t need to pay a fixed amount over a specified period of time, nor do you need to return it since there’s no contract binding you to it. You could claim full ownership over the equipment and use it freely for as long as needed.
For some print shop owners, the feeling of ownership is something to be proud of since you’ve bought it through your business’ profits. But besides that, owning the equipment means deciding how to use it, including how often to maintain it. With leasing, the lease may stipulate a fixed schedule for maintenance, so if anything were to happen outside of the scheduled times, you might be unable to rectify the problem.
Long-term Investment
Buying equipment is an investment; of course, you’d need to make the most of your investment throughout the equipment’s lifespan. When it comes to purchasing, however, you should ensure that you’re buying something that’s not only tried-and-true equipment but also won’t become obsolete in a few years. If you purchased something relatively new but is eventually replaced by something better and, perhaps, cheaper, wouldn’t that purchase be considered a waste of resources?
Take both automatic screen printing presses and DTG printers. In the former’s case, these machines help to optimize the screen printing process through automation, increasing productivity without sacrificing print quality. They allow a shop to exceed their production by a considerable margin compared to using conventional manual presses. Even if you no longer need them, you’ll be able to recoup part of their cost when you sell them; it’s possible to sell your unwanted presses at a 25 percent discount from their original price.
On the other hand, DTG printers are constantly evolving as digital printing technology steadily improves. New machines released today, considered cutting-edge now, would soon be exceeded by newer ones introduced not long after. As such, the utility of these DTG printers and their resale value will only become less appealing over time. In many cases, used DTG printers will sell for 50 percent of their original price, a steep drop from the costly initial investment it took to acquire them in the first place.
Knowing what to buy ensures you have sufficient capital for other business expenses and the necessary equipment to significantly contribute to your overall operations for a very long time.
Reliability of New Equipment
Where possible, you’d much rather purchase a new piece of equipment than an older one, even if the latter is going for cheap. Not only is it a matter of equipment becoming obsolete, but you also want equipment that works reliably for a long time. New equipment generally provides peace of mind since they’re brand new, but you also get warranty coverage for anything that might occur in the first few weeks or months of owning it.
Tax Incentives, Too
Buying equipment also entitles you to certain tax incentives. Section 179 of the US Internal Revenue Code does allow a business to take an immediate deduction for business expenses for acquiring “depreciable assets” such as equipment and software. This provides much-needed tax relief for startups looking to acquire the needed equipment to get their business going, so long as the purchased equipment meets Section 179’s stipulations.
Again, be sure to speak to a professional tax consultant first to get an idea of what tax incentives you may be eligible for.
The Disadvantages of Buying Equipment
High Upfront Costs
Spending tens of thousands of dollars on equipment is a big, expensive decision. That expense could take a hefty toll on your overall cash flow if you didn’t account for it ahead of time. On top of that, this amount could have been invested in other needs for the company, such as future growth or marketing plans.
Obsolescence
As mentioned earlier, you don’t want to be caught buying equipment that’s rendered obsolete within a few months of a newer equipment’s introduction. If it can do what your equipment does but more efficiently or with better results, you’re operating at a productivity loss.
Diminished Resale Value
Once you’ve bought the equipment and no longer want or need it, selling it requires you to reduce its price significantly from its original retail price.
Unexpected Maintenance Requirements
Regular maintenance helps keep your equipment running smoothly for a long time, but there will be occasions when the equipment may need unexpected repairs. In such instances, that means having to sit through downtime where you’re not printing anything. Every minute of downtime can be costly in the long run; the longer a problem remains unsolved, the longer it takes to fulfill customer orders.
Conclusion
Leasing and buying offer a fair share of pros and cons you’ll need to consider before deciding on your acquisitions. For many shops, leasing is the most cost-effective way to acquire new equipment, enabling them to print garments and ensure steady profits over time. For established businesses, buying is the better option to own printing equipment and take control over how they’re used and maintained.
Making any kind of acquisition requires a great deal of thought put into it. Be sure to conduct all the research you need to know whether a lease or a purchase would be the best course of action required for your print shop. Make a point to factor in your overall cash flow position so that you don’t put yourself in a tight financial position from an unwise acquisition.
