I need equipment. Should I buy new or used?
The first decision to make is does your business have to have this equipment to merely operate or do you want the equipment to improve processes or business goals? If the latter, then you should perform a careful analysis on whether you can afford it (including its future operation, maintenance and insurance costs), whether the market will support your purchase, the return you expect from the purchase, if it will give you a competitive advantage or open up new markets, how long it will be relevant, its potential resale value and the overall economic health of your industry.
If you’ve run the numbers and still decide this equipment is what you need, here are some things to consider whether you should purchase new or if you could save money buying used.
How important is the condition? If you’re buying new, you know exactly what you’re getting. And if there’s a problem early on, it’s likely going to be under warranty. It’s also going to last longer because you’re acquiring it at the beginning of its life cycle. Used equipment could have a sketchy history and any warranty might have expired. If it breaks before its useful life is up, you’re out money for repairs or a full replacement. Buying refurbished is another option that usually features a warranty.
How does it affect cash flow? Purchasing new can cost more, which means less money for your day-to-day operations, whereas purchasing used can keep more of your money working for the business. Leasing equipment also is a valuable consideration when it comes to cash flow, but in the long run you will end up paying more. If the equipment is for a short-term project and you don’t expect to use the equipment again, leasing (the advantage is you get the latest equipment) or buying used could make more sense. You also have more room to negotiate on price with used equipment, which could further help your bottom line.
You can finance your purchase of either new or used equipment to save business capital, and the payments could be less than what you might pay to lease. That is determined by the expected life of the equipment and length of the loan. Contact an experienced lender to talk through the best options for your particular scenario.
Consider the depreciation. Like a car, once you drive it off the lot, it instantly loses value. The same goes for equipment. If you expect to use the asset for a long time, buying new is likely the better option even with the initial depreciation. However, a benefit of buying used equipment is you aren’t hit with high depreciation upon purchase. Depending on market demand and how well you maintain the equipment, you might be able to resell for almost as much as you bought it.
You’ll want to factor in the tax implications for depreciation as well. Known as a Section 179 deduction by the IRS, depreciation for equipment can be written off in full the first year it is placed into use, up to $500,000. If you’re leasing or financing, your tax deduction can end up being greater than your loan payments your first year, returning cash to your bottom line.
Who’s available to fix it? If you buy used, is there a local specialist if the equipment needs repair or service or do you have someone in-house with the requisite knowledge? Are older models harder to fix or have parts that aren’t quickly available? If so, that could stall your operation, which means you likely aren’t making money. New equipment might help you avoid those issues, although purchasing used as a backup could net you a lower price while helping you avoid downtime.
Do bells and whistles matter? You can purchase a higher-end model with the best technology for less money if you buy almost new. Or if having the latest and greatest improvements aren’t important, you can possibly buy more than one used version for the price of new.
Is it used sparingly? Seasonal equipment that is employed enough so that leasing isn’t a good option is an excellent candidate for buying used. If you buy new, that equipment has more money tied up in something that isn’t necessarily critical to your business.
If you’re still unsure whether new or used equipment is right for you, seek out lessons learned from colleagues and advisors you trust. Experience is a precious asset, too. You can learn a great deal about your realistic options and how to view the pros and cons to make the best choice for your business.