Should I Buy or Rent My Auto Repair Shop Equipment?
This is a common question amongst auto repair shop and collision shop owners. Some financial decisions are easy. When it comes to choosing their biggest purchase, a place to live, most people intuitively know it is better to buy their own home rather than to lease one for years on end. Besides the pride of ownership, a part of each monthly mortgage payment goes into building equity for the proud owners.
There are also tax advantages to owning a home. In addition, it will usually appreciate in value over time, and the mortgage will eventually be completely paid off. It is intuitively easy to weigh those four aspects of a purchase verses lease decision. When it comes to buying or leasing new shop equipment, though, the financial issues get blurry. To help clear things up, let’s look at some common misconceptions about equipment leases.
Myth #1, Leases Don’t Affect Your Credit Standing
Definitely not true. When you sign a lease contract it counts as a legal debt that you are obligated to pay back. You are a debtor, just like when you take out a loan to finance a major purchase. So, if you sign too many leases for lots of nice new equipment, then apply for a mortgage to buy a shop building of your own, you could be denied credit. Ouch. So, plan ahead.
Myth #2, Leases Don’t Count as a Personal Liability Against You
Again, not true. In a typical family-owned business, even if it is incorporated, equipment leases will sometimes include a personal guarantee of payment by the business owner. For that reason, it is always a good idea to have your attorney (you do have one to advise you, right?) look over any lease contracts before you sign them.
Myth #3, Leasing is Always ‘Cheaper’ Than Buying
Better have your accountant look over that lease before you sign it. Leases always have a financing cost built into them, but don’t expect to see those figures spelled out for you. You have to figure them out for yourself, then compare them to a purchase/finance contract to determine which is the better deal. Don’t be the person who pays lease installments equivalent to financing the equipment at well over 20% interest. With decent credit, you can expect to buy it cheaper than that.
Here’s a tip. To easily see what the monthly payments would be to buy equipment, look online for free amortization calculators. Just plug in your anticipated interest rate, the amount you would borrow, and the number of years you expect to make payments on the loan. Push a button and your monthly payment will appear. That alone can be a real eye opener when evaluating leases verses buy contracts.
Myth #4, a $1.00 Buy-Out Makes Any Lease a Good Deal
It sounds appealing: You don’t need a down payment or collateral. Simply make lease payments for a length of time, pay only $1 at the end of the lease, and then you own the equipment. What if your accountant tells you that lease has an imputed rate of interest that is three times higher than what the bank would give you? Depending on your circumstances, your best decision might be to borrow the money and negotiate a better purchase price on the equipment for cash.
Myth #5, You Can ‘Always Write Off’ 100% of Your Lease Payments Against Your Taxes
Sorry to tell you this, but you are not the first clever person to think of that idea. Long ago the IRS came up with the concept of capital leases to thwart that very idea. The tax rules change every so often, but typically you won’t like how they work. So, have your accountant or tax advisor look at that lease arrangement before you sign it. That is especially important if your number one reason for leasing was to gain some type of tax advantage. Be safe, not sorry.
It Takes Equipment to Make Money
Up to this point you might think that I’m against equipment leases. I’m not. But I am against wasting financial assets, and for helping you get the most out of the money, cash flow and credit you have at your disposal. In the big picture, it is better to have more equipment in your shop, at the lowest overall cost(s), all things considered. To that end, leases, no matter how attractive they might look, don’t always win ‘hands down’ over a well-negotiated loan.
Here an example. Let’s say a shop doesn’t have an alignment rack and related equipment. Instead they sub out the alignments on all their steering and suspension jobs. To retain that little extra profit, the shop is considering borrowing tens of thousands of dollars to buy a nice alignment setup. They can also lease it on similar terms.
Either way it doesn’t make sense. True, the shop will probably sell more alignments and suspension work once they have the equipment in place; till then it’s only natural to avoid sales that force you to sub out work. But overall the purchase probably won’t make money each month for a small shop. They are spending too much to gain so little.
Their return on investment, though, would be higher acquiring equipment that costs a lot less but will let them expand their services into new, more profitable areas. As strange as it seems, I have seen shops that don’t do air condition work. It boggles the mind, to lose all that high-profit work to avoid such a small outlay of capital. Even if their credit was bad, and the lease terms were not good, a shop in those circumstances could still profit from leasing some a/c equipment. See the point?
One More Option
If you have a growing shop, get on a first name basis with a bank commercial lending officer. See what he or she can offer you in terms of credit. Then scour the auctions, online and locally, to see what equipment you can pick up for cheap from closed businesses. Did you auto repair shop decide to rent or purchase new equipment? Tell us in the comments.