Should your business be considering acquiring a new asset to increase the size of your operations or to simply replace existing equipment with a modern alternative, you should carefully consider the implications of either purchasing the asset or leasing it. There is merit to both alternatives, however the decision as to which approach is taken should be based on an understanding of your current situation .
Each business is unique, and the decision to purchase or lease equipment should be taken into consideration on a case by case approach. This blog will outline the what is meant by both, and how they impact upon your business.
The outright purchase of a piece of equipment that results in ownership.
Pros to asset purchase
Ownership – The main advantage of ownership is that it enables you to do as you please with the asset. For example, you would therefore not be held accountable to a contract which dictates usage. Ownership gives you full autonomy over the asset.
Capital Gains Roll-over Relief – Another benefit to asset purchasing is that if you have liquidated an existing asset to allow you to buy a new one, you may be eligible to delay paying capital gains tax. This means you won’t pay tax until the new asset is sold.
Cons to asset purchase
Higher initial expense – Whether you decide to buy the asset outright with cash, or approach a bank to borrow the money (who will typically require a 20% down payment), this cost will have a significant impact on your cash flow and subsequently your ability to meet other short term liabilities. Depending on the cost of the asset, most organisations will borrow the money from the bank which can impact your ability to borrow more capital in the future as you have existing debt.
Re-sale and depreciation – Depending on the asset bought, it may not have a particularly long usable life and therefore you find yourself constantly having to upgrade every few years to keep pace with competition. You often then have to negotiate the sale of your current assets to generate cash for your new purchases, and like most assets their value will have depreciated over the years.
An agreement that enables a leaser to borrow a piece of equipment over a defined period which is paid for in monthly instalments, before being returned on the agreed date.
Pros to asset leasing
Lower initial expense – The main advantage to leasing an asset is the minimal initial impact upon cash flow. Leases rarely require down payments and therefore allow you to obtain the required asset with minimal initial expenditure.
Claim as a business expense – Lease payments can often be deducted as business expenses on your tax return, thus helping to reduce the net cost of the least.
Flexible terms – Leases are usually easier to obtain and have a greater flexibility surrounding the length of the lease term. This obviously provides a significant advantage to you if you have bad credit, or are hoping increase the length of the lease to lower your monthly costs.
Easier to upgrade – It may be the case that the equipment you require is consistently developed and improved over short periods of time (an example would be IT equipment). Leasing is an advantage in this situation as you won’t have to constantly sell existing equipment to buy the newest model
Cons to asset leasing
Higher Overall expense – Leasing is appealing due to it giving you the quick access to a needed asset with minimal initial financial outlay. However, you will always end up paying more through the interest included in the monthly instalments.
No ownership – You can often be held accountable to asset usage rates, and you have to return the asset after the lease agreement which can be an issue if it’s still regularly used (and can impact upon your productivity if don’t have a replacement ready).
Obligation to pay for the entire lease term – If you stop using the equipment for whatever reason, you will still be required to make payments until the lease contract has expired. However, you may have the option to cancel the lease but you are likely to face large termination fees.
There are pros and cons to both asset leasing and asset purchase – the appropriate method varies from business to business based on your particular circumstances including what the asset is needed for, how long you’ll use it, and the financial implications for your company’s cashflow.