🛒 What is Purchasing?
Definition: Purchasing means buying an asset outright so the business owns it completely.
Advantages of purchasing
- The business owns the asset — it appears on the balance sheet
- No ongoing monthly payments after the initial cost
- Can sell the asset later if no longer needed
- Cheaper in the long run than leasing
Disadvantages of purchasing
- Requires a large upfront payment (affects cash flow)
- Asset may become outdated (especially technology)
- Business is responsible for maintenance and repairs
- Ties up capital that could be used elsewhere
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📋 What is Leasing?
Definition: Leasing means renting an asset for a set period by making regular payments. The business uses the asset but does not own it.
Advantages of leasing
- No large upfront cost — preserves cash flow
- Easy to upgrade to newer models when the lease ends
- Maintenance may be included in the lease agreement
- Fixed monthly payments make budgeting easier
Disadvantages of leasing
- More expensive over time than buying outright
- Business never owns the asset
- Locked into a contract — penalties for early termination
- Cannot sell the asset later
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⚖️ When to Purchase vs When to Lease
The decision depends on the business's financial situation and the nature of the asset.
Purchase when...
- The business has strong cash reserves
- The asset will last a long time and hold value
- Long-term use is planned (e.g. buying a factory)
- The business wants to build its asset base
Lease when...
- Cash flow is tight or the business is a start-up
- Technology changes rapidly (e.g. IT equipment)
- The asset is needed for a limited time
- The business wants to avoid large upfront costs
Example: A taxi company might LEASE its vehicles (easy to upgrade every 3 years) but PURCHASE its office building (long-term, stable asset).