Lease It Or Buy It?
A Business Owner’s Pros & Cons

by Jeff Grissler

IN THE PROFESSIONAL SPA BUSINESS, one of the greatest challenges is keeping up with the times. As styles and fashion change, spa decor and services offered also must change. To remain competitive and survive in today’s spa business, it is of the utmost importance to keep updating spa equipment.

By attending any spa and medical show or reading any spa literature these days, one will be amazed at the innovative and exciting spa and medical equipment being offered. However, costs associated with the purchase of this equipment can be overwhelming to a business owner. There are many factors for spa owners to consider in determining when to buy or lease equipment.

One of the most critical elements is looking at the overall business plan. The plan should make provisions for what type of services and expansion will be needed for the next five to 10 years. An important factor is the estimated cost of the equipment needed to stay competitive. How does a spa pay for this equipment? Most companies put all of their cash resources back into the business’s overhead, enabling it to thrive.

Using cash or valuable bank lines of credit usually are essential for financing daily or short-term business needs, i.e., paying suppliers, meeting payroll or dealing with any business emergency. Most business owners would prefer to buy than lease, provided they have excess cash on hand.

Bank lines of credit or cash on hand are not the only answers for funding long-term assets such as spa equipment. Even so, using these purchase options for spa equipment not always is the wisest financial business choice.

Evaluating costs is more complicated than just comparing the lease amount versus the cash purchase price of the equipment. The best option for the spa owner will be determined once the overall cost and the actual lease payments are evaluated.

Break down the lease payment weekly and then daily to compute how many services it actually takes before one can pay the lease payment and generate a profit. The proceeds generated from the productivity of the new equipment should be greater than the payment. This lease payment is a fixed monthly cost, which should be easier to budget than a large cash outlay. Purchasing the equipment outright negatively alters available cash flow. This is a key point when deciding to lease or pay cash for equipment.

Unfortunately, new technology and specialized equipment becomes obsolete quickly. New equipment should definitely increase efficiency for the staff, lower operating costs and ultimately increase profits. Buying this equipment makes no economical sense if the average life of the equipment is less than five years. Leasing is a better option for short-term use.

Cash is a better alternative when there is an upfront discount on the equipment’s purchase price. If and when a significant cash savings will be realized, it is an important option to consider. In this case, it would make sense to pay cash rather than lease.

Another example of cash being beneficial for the purchase of new spa equipment is when the net present value of your cash on hand is earning a sufficient percentage amount of interest in savings or investments. If the purchase of new equipment increases cash flow and profits in the spa, one must compute the profits and see if this overall earned income is higher than what the cash would have earned while being invested. If the profits are higher, then this would be an ideal situation where one would want to pay cash rather than lease.

If the spa owns its equipment in the facility, the owner generally will be entitled to a depreciation tax deduction (or a first-year write-off under code section 179). Thanks to recent tax-law changes, this year’s new-equipment purchases may be eligible for bonus depreciation deductions.

Payments on leased equipment also are tax deductible. Before considering leasing or buying new spa equipment, consult an accountant or financial adviser to determine what option would benefit the business needs at the time.

In closing, there is one very important aspect that many financial advisers and accountants have preached to business owners for years: “If the new equipment appreciates in value, buy it. If the equipment depreciates in value, lease it.”

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