When it comes to major capital purchases, it can be difficult to decide whether you should buy or finance the equipment your business needs. Both options make commercial sense in certain circumstances.
For a small business that is just getting off the ground, financing equipment is a good idea. Leasing equipment does not require you to have a lot of cash up front, and it will allow you to keep costs down – plus it means that you can always return the equipment and take out a new lease at a later date. It’s easy to upgrade equipment when you need to.
Financing on a lease-to-buy works well too, for equipment that has a long useful life. Plant and machinery that will last for a decade or more if well maintained can be bought by spreading the cost over many years.
The downside of this kind of finance is that in the long run you will end up paying more for the equipment – and it is not yours until you have paid the cost off. In addition, the tax situation for equipment bought in this way is not always as favourable as the tax treatment for capital purchases made outright – where you can offset depreciating assets quite easily.
Leasing vs Finance
Leasing is quite business-friendly. You usually don’t have to make any initial outlay. You just pay on a have to make sure that you can make the monthly payments.
The terms on #equipment finance tend to be quite flexible – this can be good for companies that are new, have poor credit, or need to negotiate a relatively long payment plan to keep monthly costs down. For a relatively new business that is unsure of their cash flow, this can be a lifeline.
The downside, of course, is that you aren’t building any equity by leasing equipment. If you take out a loan and buy equipment outright, then you will at least ‘own’ the equipment and be able to sell the equipment later, and maybe have some money left over after the loan.
If you do take out a lease, then you are obliged to pay for the entire term – even if you decide that you do not want to use the equipment. You may be able to cancel the lease, but you should not count on this.
With outright purchasing, the up-front outlay is greater, but you own the equipment and it is yours to do with what you wish – including modifying or selling the equipment. This is great for long-lasting items, but it is not such a good option for things that become outdated quickly.
You can deduct the cost of recently purchased assets over the first year of ownership. So you can save a lot of money on tax on your capital expenditure – and this can help you to slash your tax bill by a significant margin. The risk is that you can be stuck with the equipment for years, and if the asset depreciates in value quickly, it could be a long time before it ‘earns out’ the amount of money you spent on it.
Financing is a good option if you cannot afford massive capital expenditure in the short term, but have a predictable income. Buying outright makes sense if you can afford to do so, and the asset is something that you will keep for years, or that you will be able to re-sell for a lot of money when you are done using it.