Should you buy or lease your business assets?

There are likely to be certain items of equipment, machinery and hardware that are essential to the operation of your business – whether it’s the delivery van you use to run your home-delivery food service, or the high-end digital printer that’s central to your printing empire. But when a critical business asset is required, should you buy this item outright, or should you lease the item and pay for it in handy monthly instalments?

Buying new pieces of business equipment, plant, machinery or vehicles can be an expensive investment. So, depending on your financial situation, it’s important to weigh up the advantages and disadvantages of buying outright or going down the leasing route. There are pros and cons for each solution:

Buying
Pro: Buying gets you a tangible asset – when you buy an item, you own the item and it will appear on your balance sheet as one of your business assets. As such, by owning these assets outright you increase the perceived capital and value of your business. You can also claim the cost of the asset against your capital allowance for tax purposes.

Pro: It belongs to you – once you own the item, you have full use of the equipment for the duration of its life. Your use of the asset isn’t reliant on you being able to keep up regular lease payments, and if your financial circumstances change then you can sell the asset to free up the capital.

Con: It’s an expensive outlay – paying for the item up-front will require you to have the cash to cover this cost. Spending a large lump sum in this way may take cash away from other areas of the business, so you need to be 100% sure that this purchase is the right decision and a sound investment.

Con: You may require extra funding – if you don’t have the liquid cash available to buy the item outright, you may need to take out a loan. Asset finance is available from funding providers, but does tie you into a loan agreement that will add to your liabilities as a business – reducing your worth on the balance sheet.

Leasing
Pro: Leasing has a cheaper entry point – if the item you need to purchase has a large price tag, leasing allows you to make use of the asset without the cost of buying it in full. For start-ups and smaller businesses with minimal capital behind them, this can make leasing a very attractive option. You may not own the asset, but you can still make use of it – and this may be the difference between the success or failure of your business.

Pro: You can spread the cost – there is still an associated cost of leasing, but you can spread the cost over a longer period, making it easier to find the necessary liquid cash to meet your lease payments. You also have the option to invest the money you save in other areas of the business, helping you to expand, grow and bring in more customers and revenue.

Con: You don’t automatically own the asset – there are different types of leasing agreement. Under a capital lease, you do own the asset once you’ve paid if off. But if you opt for an operating lease, this is more of a short-term arrangement and you won’t own the asset at the end of the contract. Ownership does have its advantages – including being able to sell off the asset if you need to – so it’s important to consider what kind of leasing agreement you’re entering into and what the advantages and disadvantages may be.

Con: You may pay more in the long run – most leasing agreements will attract additional costs and interest on your agreement, so you may well end up paying more than the market price for your asset in the long term. If you can cope with the higher cost, this is fine, but bear in mind that buying outright may have offered greater value.

Con: You may lose the use of the asset – if you can’t keep up your lease payments because of cashflow issues, for example, the lease owner may recall the asset. If this item is crucial to your business model, losing this key asset would have a profound impact on your ability to operate. In this respect, leasing is a riskier strategy, but it’s definitely an easier option if your cash is limited.

As Ben Case, owner of decimal+ accountants in Newmarket points out, when it comes to deciding whether to lease or buy it’s vital to take a rounded view. ‘There’s no one-size-fits-all policy regarding how to fund assets for your business,’ says Ben. ‘As a result, it’s important to talk to your accountant to ensure that you take everything into consideration. Access to cash is clearly paramount, but equally as significant might be the effect that delaying a purchase due to lack of funds could have on your competitiveness and ability to grow. In that latter scenario, leasing can deliver quick wins, albeit at an increased cost. Here at decimal+ we’re able to work through different options with our clients to help them select the funding solution that best suits their specific business.’

Decimal+ are accountants in Newmarket and Cambridge, and we help our clients decide on the best way to fund their assets as well as assisting with cashflow, VAT and business growth. Why not contact us for an initial discussion?