The quote is on the desk. A skid steer, a second truck, a CNC machine, a walk-in cooler, the software the sales team keeps asking for. The dealer has a financing offer stapled to it, your accountant has mentioned a write-off, and the question everyone around you is arguing about is lease or buy. That is the second question. The first one is whether the business should acquire this thing at all -- and most owners never ask it in numbers, because the machine is exciting and the rental invoices are annoying.
This page is the whether-at-all decision. It walks through the six questions that decide it, the three numbers that settle it (cost of ownership, payback, and cash survival), a worked example with real arithmetic, and what to do with each of the six answers: buy cash, finance, lease, wait, buy used, or do not buy. The free calculator runs the same math on your numbers.
The Real Problem: Owners Start at Lease vs Buy and Skip the Question Underneath
The first instinct is to compare structures. Finance at the dealer's rate, lease it for three years, or write a check -- and the write-off conversation gets folded in, because a Section 179 deduction feels like a discount. It is not. A tax deduction changes when you deduct a cost you still paid; it does not turn a machine that loses money into one that earns it. The structure question and the tax question both assume the purchase is a good idea. Nobody has checked yet.
There are exactly two ways an equipment purchase fails, and neither shows up in a lease-vs-buy comparison:
- The work is cheaper to get done without it. What you pay today for rentals, subcontractors, overtime, or the jobs you turn away is less than what owning the machine would cost you every month. The rental invoice is annoying, but it is the cheaper machine.
- The money you are crediting to it is not really its. "It will let us take on more work" is the sentence that funds most bad purchases. If you cannot name the jobs, the contract, or the customers you turned away, the extra revenue is an estimate, and an estimate is not evidence.
Either failure alone means do not buy, and you can find both from your own numbers, with no benchmark and no vendor input. That is why the whether-at-all question comes first: it is the only one you can answer before anyone tries to sell you anything.
Six Questions Before Any Quote Matters
These are the inputs. Answer them from your own records, not from a brochure. The right-hand column says who in your finance setup can pull each number if you cannot.
| Question | Where the number comes from | Who can pull it |
|---|---|---|
| 1. What do you pay today to get this work done without it? | Rental invoices, subcontractor bills, overtime on the payroll register, and the jobs you declined in the last twelve months | You, or your bookkeeper from the vendor and payroll ledgers |
| 2. What extra gross profit will it actually earn, and can you name the jobs? | Revenue you turned away or a contract in hand, minus the direct costs of doing that work (labor, materials, fuel) | You; a controller if you need job-level margins to answer it |
| 3. What will it cost to own and run each year? | Insurance, maintenance, fuel or power, storage, licensing, software fees -- from your existing equipment's history | Bookkeeper, from the expense accounts of what you already own |
| 4. How long will it be useful to you, and what is it worth at the end? | Your own experience with the last one; auction and resale listings for the end value | You |
| 5. What cash has to stay in the bank no matter what? | Your monthly payroll, rent, loan payments, and tax set-asides, times the number of months you refuse to go below | Bookkeeper for the outflows; you for the floor |
| 6. What is the longest payback you will accept? | Your own rule -- shorter than the useful life, and shorter than any loan or lease term | You |
Question 1 is the one owners most often answer with zero, and it is almost never zero. If you are getting the work done today, somebody is being paid to do it. Question 2 is the one owners most often answer too generously.
If the alternative to the machine is a person -- a second operator instead of a rental, a hire instead of a subcontractor -- the same whether-at-all test applies to the hire, and the number owners get wrong there is the loaded cost, not the wage. Can you afford another employee? runs that side of the decision from your own numbers.
The Math: Cost of Ownership, Payback, and Cash Survival
Cost of ownership per month. Take the price, subtract what you can sell it for at the end, spread the difference over the months it will be useful, and add the monthly cost to run it. That is what the machine costs you every month whether it works or sits. It is also the break-even: the benefit it has to produce every month just to be worth owning.
Benefit per month. What it saves you (question 1) plus the gross profit it earns (question 2). If the benefit is smaller than the cost of ownership, stop. The way you get the work done today is cheaper.
Payback. The price divided by the net monthly cash the machine adds (benefit minus running cost). Payback has to land inside the useful life -- if it does not, you are still paying for the machine after it stops producing -- and inside any loan or lease term, and inside your own limit if you set a tighter one.
Cash survival. Paying cash has to leave your floor intact: cash today minus the price, compared against the months of unavoidable outflows you decided to keep. If it does not, cash is off the table, and financing or leasing enters -- but only on terms you are actually holding. A "typical rate" is not a term.
The downside. If the new work comes in at half what you expected, can the cash above your floor carry the shortfall for six months while you fix it? If not, de-risk first: a smaller unit, a used one, a shorter commitment, or evidence that the work is real.
Worked example: a $48,000 skid steer
An excavation and landscaping contractor rents a skid steer for seven months a year at $2,400 a month and turned away two graded-lot jobs last spring for lack of a second machine. The dealer's all-in price on a new unit is $48,000. Here is the whole decision on those numbers.
| Line | Number | Where it came from |
|---|---|---|
| Price, all in | $48,000 | The dealer's quote, including delivery and tax |
| Useful life / resale at the end | 8 years / $8,000 | The owner's last machine; auction listings for eight-year-old units |
| Cost to own and run per year | $4,200 | Insurance, maintenance, and fuel from the existing fleet's ledger |
| Cost of ownership per month | $767 | ($48,000 - $8,000) over 96 months = $417, plus $350 to run |
| Cost it replaces per month | $1,400 | $2,400 x 7 months of rental = $16,800 a year, averaged |
| Extra gross profit per month | $500 | Two named turned-away jobs, about $6,000 of gross profit a year, averaged |
| Benefit per month | $1,900 | $1,400 + $500 |
| Net monthly cash it adds | $1,550 | $1,900 - $350 running cost |
| Payback | 31 months | $48,000 / $1,550; the owner's limit is 36 months |
| Cash today / unavoidable monthly outflows / floor | $95,000 / $32,000 / 2 months | Operating account; payroll, rent, loan payments, tax set-aside |
| Cash after paying cash | $47,000 | $95,000 - $48,000, against a $64,000 floor: short by $17,000 |
| Dealer financing held: 9.5% for 60 months, $4,800 down | $907 a month; $11,237 total interest | From the financing offer stapled to the quote |
| Downside at half the new work | +$393 a month | $1,400 + $250 - $350 - $907 |
| Verdict | FINANCE | It pays, cash would breach the floor, the held terms clear, the downside survives |
Notice what decided it. The machine passed the whether-at-all test on the rental cost alone: $1,400 a month of avoided rental against $767 a month to own, before crediting a dollar of new work. The two turned-away jobs made the payback comfortable rather than merely acceptable. Cash ruled out writing a check, and financing only entered because the owner was holding actual terms. Had the same owner entered "we could probably do two more jobs a month" as an estimate with no named jobs, and the payback depended on it, the calculator would have said wait -- rent for another season and count.
Change one input and the verdict changes. Drop the rental to $600 a month because the machine is only needed in March and April, and the picture changes: $600 of avoided cost plus $500 of gross profit is $1,100 against $767 to own, so it still clears the whether-at-all test, but the net cash it adds drops to $750 a month and payback stretches to 64 months against a 36-month limit. Do not buy new; price a used unit, or keep renting.
What to Do With Each Answer
| Verdict | What it means | Next action |
|---|---|---|
| Buy cash | It pays, and the check leaves your floor intact | Put the purchase in week 1 of a 13-week cash flow forecast before the money moves, so the floor is a number you watch |
| Finance | It pays, cash would breach the floor, and the loan terms you hold fit inside the net benefit and the useful life | Get the books lender-ready before you apply: the books-ready-for-a-loan diagnostic, and what financial statements a lender needs |
| Lease | It pays, cash would breach the floor, and the lease terms you hold are the cheaper way through the commitment | Put the payment into the 13-week forecast and confirm the floor holds every week; read the end-of-term buyout and return terms before signing |
| Wait | Either the cash is not there yet, or the verdict depends on an estimate | For cash: find the week the forecast clears the floor plus the price. For evidence: rent or subcontract for 60-90 days and count the hours and the jobs, then run it again |
| Buy used | New does not clear, but a specific used unit you priced does | Run the numbers again with the used price, the shorter life, and any refurbishment cost added -- the verdict has to hold on those too |
| Do not buy | The work is cheaper to get done without it, or nothing attributable pays for it | If you could not answer question 2 because you cannot tell which jobs make money, that is a job-costing question before it is an equipment question. If cash is the block, start with profitable but out of cash |
Leasing Equipment vs Buying: When the Structure Question Is Real
Once the purchase has passed the whether-at-all test, and only then, lease vs buy vs finance is a real question -- and it can only be answered with your own terms. The rule that governs it is simple: if the net cash the machine adds over the commitment cannot cover the cash price, no structure at any cost fixes that. Leasing does not make a machine that loses money profitable; it spreads the loss out.
With terms in hand, the comparison is total cost to control the machine over the horizon. Financing: down payment plus every payment, minus what you sell it for. Leasing: every payment plus the buyout if you intend to keep it, or the payments alone if you return it. Compare those two numbers and the cash each one leaves in the bank in month one. The calculator does this when you enter both sets of terms.
Two reference points, from non-seller sources, for judging the terms you are offered:
- Loan rates. The SBA publishes maximum interest rates for 7(a) loans as the base rate (prime) plus a spread that steps down with loan size, from roughly 6.5 percentage points on the smallest loans to 3 points above prime on loans over $350,000. A dealer or equipment-finance rate well above the SBA ceiling for your loan size is a reason to get a second quote, not a reason to buy faster. Check the current schedule on SBA.gov; it changes.
- Useful life. If you have no better number, IRS Publication 946 classes most machinery and equipment at seven years and cars, light trucks, and computers at five years for depreciation. That is a tax convention, not your machine's real life -- but a payback longer than the IRS's own recovery period for the asset class is a warning.
On the tax angle: Section 179 expensing and bonus depreciation can put most or all of the price on this year's return instead of spreading it over the recovery period. That accelerates a deduction; it does not create profit, and the cash still left. It is a real consideration after the purchase clears, and it is a question for your CPA, who will also tell you it changes with each year's tax law.
How to Pick a Cash Floor If You Do Not Have One
The JPMorgan Chase Institute's 2016 study of about 600,000 small businesses found the median firm held 27 days of cash buffer -- enough to cover its typical outflows for less than a month -- and a quarter of firms held fewer than 13 days. That is the population you do not want to join by writing a check for a machine. Set the floor in months of the outflows you cannot skip: payroll, rent, loan payments, tax set-asides. Two months is a common owner rule; a business with lumpy receivables or a long winter needs more. Whatever the number, decide it before the quote arrives, not while looking at it. If you are already below the floor you would set, the equipment question is a cash question first, and growth that eats cash is the usual reason.
When This Is Not the Right Starting Point
If the purchase is a loan application and the books are not current, the lender will read the financials before the business case -- start with who should prepare loan financials and the personal financial statement the SBA will ask for. If you cannot answer question 2 because you do not know which jobs make money, that gap will swallow every equipment decision after this one; busy but not profitable is the place to start. And if the item is software rather than a machine, the same test applies with one change: the annual cost of the status quo -- hours times what those hours cost you, plus the rework -- is the most the software can be worth, and no vendor's list price changes that.
Frequently Asked Questions
Should I buy or lease equipment for my small business?
Decide whether to acquire it at all first. Compare what you pay today to get the work done (rentals, subcontractors, overtime, turned-away jobs) against the monthly cost of owning it; if owning is not cheaper and the extra gross profit is an estimate rather than named work, do not buy. Lease vs buy vs finance only becomes a real question after that test passes, and only with your own quoted terms.
What is a good payback period for equipment?
Shorter than the useful life of the machine and shorter than any loan or lease term, or you are still paying for it after it stops producing. Many owners set a tighter limit of their own, such as 24 or 36 months. A payback longer than the IRS depreciation recovery period for the asset class (seven years for most equipment, five for vehicles and computers) is a warning sign.
How much cash should a small business keep before buying equipment?
Enough to cover the outflows you cannot skip (payroll, rent, loan payments, tax set-asides) for a number of months you decide in advance. The JPMorgan Chase Institute found the median small business held only 27 days of cash buffer. Paying cash for equipment should leave your floor intact; if it would not, financing or leasing on terms you actually hold, buying used, or waiting are the options.
Does the Section 179 deduction make buying equipment worth it?
No. Section 179 and bonus depreciation change when you deduct a cost you still paid; they do not turn a machine that loses money into one that earns it. Run the whether-at-all test first, then ask your CPA about the tax treatment of a purchase that already clears.
Sources
- JPMorgan Chase Institute, Cash Is King: Flows, Balances, and Buffer Days (September 2016): median small-business cash buffer of 27 days; 25% of firms below 13 days.
- U.S. Small Business Administration, 7(a) loan program maximum interest rates (base rate plus a size-tiered spread), published on SBA.gov and in the SBA Standard Operating Procedure 50 10; confirm the current schedule before comparing a quote.
- Internal Revenue Service, Publication 946, How To Depreciate Property: MACRS recovery periods (five years for cars, light trucks, and computers; seven years for most machinery and equipment).
- Every other number on this page is either the worked example's own arithmetic or comes from your records. No price, rate, or fee here is a benchmark.
Next Step
If there is a quote on your desk, the first move is the whether-at-all test on your own numbers, before the lease-vs-buy argument and before the write-off conversation. The should-I-buy-this calculator at GetAFractional runs it in about five minutes: cost of ownership, payback against your limit, cash after purchase against your floor, and the six-way verdict, with every field blank until you fill it.
If the answer comes back finance and the loan is the next hurdle, the books-ready-for-a-loan diagnostic shows what a lender will flag before you walk into their office -- see also financial statements for an SBA loan for the fuller breakdown of that question.
This article is informational and does not constitute financial, legal, or tax advice. Consult a qualified professional for decisions specific to your situation.