Lease, Rent, or Buy: Comparing Ways to Pay for Investments

One investment, four routes

A business needs a new machine for 100,000 euros. It can pay from its own funds, buy it with a loan, lease it, acquire it through hire purchase, or rent it only for the duration of one contract. All five routes lead to the machine standing in the workshop. They differ in who owns it, what it costs in total, how heavily it weighs on liquidity, and who bears the risk that it loses value faster than expected.

The guiding question is: When is leasing, renting, hire purchase, or buying the better way for a small or midsize business to pay for an investment? To answer it, we first clarify the terms, then introduce the mental model of the repossession advantage, compare the forms, work through an example, and weigh two views.

Terms: buying, leasing, hire purchase, and renting

• Buying: The business acquires the asset and becomes its owner, paying from its own funds or with a loan. It depreciates the asset over its useful life and bears all opportunities and risks of its value.
• Leasing: A lessor buys the asset and provides it to the business against monthly payments for a fixed basic lease term. In the finance lease common in Germany, the lessor generally remains the beneficial owner as long as the basic term is between 40 and 90 percent of the usual useful life and no special purchase options effectively transfer ownership.
• Hire purchase: The business pays installments and becomes the owner with the last one. For tax purposes, the asset is treated as its own from the start, so it depreciates it itself.
• Renting: The business uses the asset for a short or cancelable period. Maintenance and loss in value usually lie with the lessor. This suits peaks, individual contracts, or trials.

The basic rule from Financing business growth applies to all forms: the term of the financing matches the useful life of what is being financed. A five-year lease for a laptop that is replaced after three years violates it, as does an overdraft line for a machine that runs for ten years.

The mental model: repossession advantage versus separation costs

Finance research explains leasing not primarily with taxes but with an advantage in an emergency. Kai Li and Jun Yu (2023), building on earlier work by Andrea Eisfeldt and Adriano Rampini, summarize it this way: a lessor can take back an asset on payment default more easily than a bank can enforce its collateral, because it is the owner and not merely a creditor. This repossession advantage allows it to effectively extend more credit than a bank secured by the same asset. There is a downside: because ownership and use are separated, the user has less incentive to treat the asset with care. The lessor has to cover these separation costs through monitoring, contract clauses, and a markup in the payments.

An everyday analogy: if you lend a neighbor a bicycle, you simply pick it up again when something goes wrong. If you lend them money for a bicycle instead, in a dispute you first have to settle who is entitled to what. On the other hand, the neighbor takes better care of their own bicycle than of a borrowed one.

Leasing costs more than a loan because it still provides credit when the bank has already said no.

What studies and market figures show about leasing

Li and Yu (2023) analyzed the balance sheets of US public companies and converted rental expense into leased capital. Leased capital accounts for around 20 percent of productive fixed assets there, and for more than 40 percent among small and financially constrained firms. The share rises in bad times, when credit becomes scarcer: its relationship with economic output is clearly countercyclical. In their model, this shift toward leasing dampens the decline in investment during downturns. The data, however, come from the US and from listed companies, and US insolvency law strengthens the lessor’s position particularly.

Beatty, Liao, and Weber (2010) found that companies with weak financial reporting quality are more likely to lease than buy. Their explanation fits the mental model: those who can give financiers few reliable figures are more likely to obtain leasing, because the lessor is protected by its ownership. The relationship weakened when banks monitored the business closely. Good figures and an open relationship with the bank therefore make buying with a loan more accessible, as How banks decide on loans also shows.

In Germany, new business in the leasing industry including hire purchase came to 83.12 billion euros in 2025 according to the German Leasing Association (BDL), 3.2 percent more in nominal terms than the previous year. Of this, 11.08 billion euros was hire purchase.

The comparison: four forms on six criteria

Two tax points belong in every calculation, even if the decision lies with the tax advisor. For movable assets acquired between July 1, 2025 and December 31, 2027, declining-balance depreciation of up to three times the straight-line rate, at most 30 percent, is possible in Germany. That favors buying and hire purchase. Conversely, one fifth of lease payments for movable assets is added back to income for trade tax, but only once all financing components together exceed the allowance of 200,000 euros. For most small businesses, this plays no role.

Worked example: a machine over five years

In the example, a machine costs 100,000 euros and is used for five years. After that, it is still worth 20,000 euros. The loan costs 5 percent interest, the lease 1,850 euros a month with no residual value for the business, and hire purchase 1,900 euros a month with transfer of ownership. Taxes, maintenance, and insurance are left out because they arise similarly in all variants or depend on the individual case.

Purely on cost, buying comes out ahead, and that is the normal case: if you buy yourself, you do not pay the lessor’s margin. Here, leasing is 18,000 euros more expensive than the loan. This difference is the price of three things the business gets in return: a credit line that stays free for other purposes, no residual value risk, and the option of switching to a new model after five years without the effort of selling. Whether that is worth 18,000 euros depends on how tight liquidity is and how certain the residual value. How the interest rate environment changes such calculations is described in Interest rates and investments.

Two views: conserve liquidity or build ownership?

The first view emphasizes liquidity and flexibility. A business that ties up its funds in machines does not have them for prefinancing, staff, or weak months. How quickly growth consumes liquidity is shown in Growth costs cash. Leasing keeps the credit line free and shifts the risk of technical obsolescence to someone who can market used equipment better.

The second view emphasizes cost and ownership. Over its term, leasing is almost always more expensive. Anyone who always leases builds up no fixed assets that later count as collateral or as value when the business is sold. Contracts bind for years and can only be ended early at high cost, even if the contract for which the machine was acquired does not materialize.

I do not consider either view generally superior. The mental model gives the direction: the tighter credit and equity, the more the lessor’s repossession advantage is worth. The more heavily the asset is used, modified, or kept for a long time, the more the separation costs speak for ownership. For short and uncertain needs, renting is often the most honest solution, even if it is the most expensive per month.

The decision in five steps

1. Estimate the useful life

   How long will the asset actually be needed? Under a year speaks strongly for renting; long use speaks for buying or hire purchase.

2. Check liquidity

   What share of the credit line and reserve would be tied up? Calculate the next twelve months with and without the purchase.

3. Assess residual value risk

   How certain is the value at the end? With rapidly aging technology, the risk is better placed with the lessor.

4. Compare total costs

   Add up all payments, down payments, interest, fees, and the residual value over the same term.

5. Have tax and contract reviewed

   Give the offers to the tax advisor and read the contract clauses on termination, return condition, and excess mileage or operating hours.

For software and digital tools, the question is slightly different, because subscriptions take the place of buying and leasing. What arises beyond the pure license is described in What software really costs.

Conclusion: which form for which investment

To the guiding question: for a small or midsize business, buying is usually the cheapest form if the asset is used for a long time and funds or credit lines are sufficient. Leasing is the better form if liquidity is tight, the credit line is needed for other purposes, or residual value risk is high. The repossession advantage explains why lessors still finance when banks are reluctant, and why that has its price. Hire purchase combines a low initial burden with later ownership; renting suits short and uncertain needs. The limits of this article: the studies come from the US, and the worked example deliberately leaves out taxes.

1. This week: List the investments for the next twelve months with their estimated useful life.
2. Before every decision: For the largest investment, obtain a purchase and a lease offer over the same term and calculate both in full.
3. After that: Have the offers assessed by your tax advisor and decide based on liquidity, residual value risk, and total cost.

The question is rarely which is cheaper, but which risk you want to bear yourself and what you need your credit line for.