Difference Between Buying and Leasing
Buying is an activity where title of ownership is assumed and any risk or rewards thereafter rests with the buyers after the payment of consideration whereas under leasing only possession and right to use an asset is acquired for a particular period of time in lieu of a periodic payment where ownership and title is not transferred.
Buying is paying the amount in full and taking ownership of a thing, equipment, an asset or a car. Leasing, on the other hand, is all about taking a thing or an asset on rent. Usually, when a business owner just starts out, they don’t have a lot of money to invest in buying fixed assetsBuying Fixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples. for their business. As a result, leasing seems to be a better option for them.
But what is the most viable option for the business owner – buying or leasing? And why one of these is so very valuable to a business?
Buying vs Leasing Infographics
Let’ see the top differences between buying vs leasing.
- Buying an asset involves the transfer of the ownership of the asset to the owner upon competition of the payment. Leasing does not lead to the transfer of the ownership of the asset to the lessee. The lessorLessorA lessor is an individual who legally owns the asset granted on a lease (rented for a long tenure) to the lessee who pays a single lump sum amount or regular payments for using that asset. remains the owner of the asset.
- Along with the ownership, the risks and rewards connected with the asset are also transferred to the owner in buying. Risks and rewards are not transferred in leasing.
- The payment that is to be made in the buying option is the cost of the asset. The same can be paid either by up-front payment or by making payment in installments. In case of leasing, lease rentals are required to be paid at periodic intervals such as monthly, quarterly or yearly. The lease rentals can either be fixed or variable based on factors such as performance, sales, etc, or it can be a combination of both.
- Buying is useful for medium or big sized entities that are capable of funding the assets and blocking amounts in assets without effecting their operational profitability. Leasing is advantageous for small-sized and start-up entities as they can enjoy the right to use high costing assets without making the initial investment.
- In the financial statements of a company, the asset which is bought can be shown in the assets side of the balance sheet and the cost of the asset can be amortized over its useful life and amortization amount can be claimed as an expense in profit and loss account. On the other hand, lease rentals paid by an entity can be claimed as an expense in the financials. However, the asset cannot be capitalized.
- A buying transaction involves two parties known as buyer and seller. While the parties to a leasing transaction involve lessor and lessee.
- In case of buying, the responsibility to carry out repair and maintenance and bearing the cost of the same lies with the owner. However, in the case of leasing, the maintenance and repair costs are to be borne by the party mentioned in the lease contract.
- Once the useful life of the asset is over or it becomes obsolete, the same can be sold by the buyer and salvage valueSalvage ValueSalvage value or scrap value is the estimated value of an asset after its useful life is over. For example, if a company's machinery has a 5-year life and is only valued $5000 at the end of that time, the salvage value is $5000. can be claimed in exchange for it. However, in case of leasing, no such benefit is available to the lesseeThe LesseeA Lessee, also called a Tenant, is an individual (or entity) who rents the land or property (generally immovable) from a lessor (property owner) under a legal lease agreement. .
Buying vs Leasing Comparative Table
|Basis for Comparison||Buying||Leasing|
|Meaning||Buying is a complete ownership transfer of a product/asset.||Leaning is getting the ownership only to use the product/equipment.|
|Ownership||Full ownership.||Ownership to use.|
|Exchange value||A lot.||Much less.|
|Flexible terms||No flexibility.||A lot of flexibility.|
|Useful to||Medium to big business owners.||New business owners.|
|Useful because||You pay an amount and you own it; there are no discrepancies.||You pay monthly/annually to use it.|
|Tax deduction||Under Section 179 of the Internal Revenue Code, you can deduct the full cost of the purchased asset.||It can be shown as business expenses and can get tax benefits.|
Buying and leasing are very important aspects of a business. A business needs to know what to buy and what to take on a lease. If the decision isn’t taken prudently, it will affect the business drastically especially when a business is just starting out.
The most important thing to consider while deciding between buying and leasing is usage. Depending on the ratio between usage and cost, the business owner should take the decision. If the ratio is bigger, buying is a good option; if the ratio is lower, leasing is the right option.
This proportion though doesn’t always work. Because you would see that if you buy the asset, you will save a few thousand dollars in two-three years. In that case, buying would be a better option even if the ratio between usage and the cost is lower.
Buying vs Leasing Video
This has been a guide to Buying vs Leasing. Here we discuss top differences between buying and leasing along with infographics and comparative table. You may also have a look at these other interesting comparisons.