Buy Or Lease: How To Access The Right Assets For Your Business
Many companies don’t understand the benefits of leasing. In fact, some companies may not even realise leasing is an option. Often people have a misconception that leasing is a lot more expensive than simply buying your asset, but, depending on the asset, that need not be the case.
Here’s how to answer the question buy or lease: how to keep employees using the right assets.
When you need to buy your asset
Buying is often a logical choice, but it’s expensive. A pro is that once you’ve purchased the equipment, you do own it. There are outright purchases (simplest option) or financing options with set monthly payments for buying equipment. If the equipment needs maintenance, that would be your job (you won’t have to wait for permission from an outside company – like a lessor) – but also at your expense.
Another plus point is you have the option to buy and sell when you’re ready and can recoup some of the costs. There are some tax codes associated with purchasing large assets for businesses, but you have to qualify for specific factors. When buying, you don’t have agreements or contracts, and that works well for small equipment that is easy to store or equipment with a long shelf life. You also have control over which asset you purchase – the specific brand, model number, and so forth – instead of having to wait for whatever the lease company has available.
On the downside, there’s a higher initial cost, which may or may not fit your budget. Higher costs mean you may have to buy equipment that isn’t top of the range because you have a limited budget. Once you’ve purchased equipment, you may be stuck with outdated technology. You then have to decide if having that outdated technology reduces the potential productivity in your company, figure out maintenance costs, repair the equipment, store it, or sell it. Depending on the type of equipment, anything you own can break and all the burden of repairing or replacing falls on you. The upside is, sometimes, warranties cover some of these damages or downtime, but you’ll have to look at the warranty closely and the length of time it covers.
Whether you buy or lease also depends on your business cashflow and needs. For example, many airlines choose to lease their fleet instead of paying the astronomical upfront costs of owning and repairing a fleet of aeroplanes. It really depends on your business and the type of needs it has. For example, if you’re an office of writers and you only really use the internet minimally and you use Google Docs or Word Processor, then your computers may technologically last five years. You may have the upfront capital to buy enough computers for the office, and save up in the next five years to replace them. But if you have an office of software developers or website developers, their productivity would be increased by having new computers every year – at the latest – in which case you may decide leasing will be the best and most financially viable option for your office or company.
When determining if owning an asset is right for your business, you need to consider the tax deductions, cost, and potential resale value over time. Think about what revenue can be generated by using this equipment, the length of time it will take for this equipment to be considered outdated, the equipment size, and overall running costs.
When It’s Better To Lease
Many individual buyers see advantages in the leasing of a car over buying – lower monthly payment, a new car every five years or so, and you can hand the keys back to the dealership instead of having to find a buyer for it. Of course, if you can buy a car without taking a loan (with interest) then you’d save more money over the lifetime, but then you have a paid off car that will depreciate in time and need upgrading – and you’re down x amount of capital upfront.
For one, when you’re leasing, you finance only the depreciation occurring during the lease terms (time period), plus fees. When you buy, you’re financing the loan value, plus the cost of the vehicle, minus your down payment, and any trade-in value.
Unless you have a hefty down-payment and trade in a high-value car, your lease payment will always be lower than a monthly loan payment. With leasing, you’re paying the difference between the car price and what it will be worth at the end of the lease (residual value).
However, the bottom line – at least for cars – is that you’ll usually pay more to lease a vehicle long-term than you would when you own the asset, but the problem arises if you need to upgrade your tech. If you have the kind of company where you need to upgrade the technology you use regularly, the flexibility offered through leasing may provide more benefits than buying.
Leasing has known tax advantages. In the USA, leasing is often fully tax deductible as an operational expense (under 179 IRS Tax Code). In the UK, any VAT charged can generally be reclaimed – however cars can be an exception depending on their use and availability. For finance leases, costs can be offset against annual profits. Any VAT registered company can recover or offset the VAT payable on monthly payments when leasing under a contract purchase. If a service or maintenance package is offered, VAT would be payable on those service costs and treated likewise.
There are fewer upfront costs with leasing. Payments are predictable which helps with budgeting. There’s no lump sum payment to make, and that allows your business to manage cash flow over time. However, the downside is if you calculate total cost, depending on the deal you get and how you manage the lease, you could end up paying more for the asset – but if you upgrade equipment regularly, these additional costs are a non-factor when the downsides are much less than the benefits (i.e. replacing equipment regularly), which can generate more income and revenue over time.
Besides the obvious benefits of having more in the company bank account, when you lease, you may not have to pay for maintenance of the equipment, so if something breaks from normal wear and tear, the leasing company fixes the equipment at no extra cost to you. These wear and tear fixes are ways that leasing can save more over time. Warranties though tend to follow the asset rather than the owner.
Leasing offers more variety in equipment choices. You don’t have to go with the lower-budget offering because you’re restricted with high upfront costs. You may also have the option of the latest high-tech gadgets or something you’ve never tried before. Your terms can be negotiated via a renewal contract, and you can find a deal that best suits your company needs.
For equipment that needs frequent updates, a renewal contract is your friend. If you need to renew annually, for example, to remain competitive in your field, then leasing means you can get that new equipment now instead of being stuck with outdated (purchased) gear. You can also shop around for equipement that suits your needs and keeps your business current.
Costs over time… and some cons
With leasing, there are usually higher costs over time than if you’d paid upfront, and many leasing agreements will also include interest. You don’t own the equipment either, which means no equity is built up and your balance sheet will look a little lacking on the assets line. Plus, you cannot sell the equipment to recoup any costs. The lease terms may be longer than you need. Strict agreements may make you pay for equipment and keep it for longer than required, which does waste funds and restrict refresh. For big pieces of equipment, that you don’t have storage space for, this requirement can be problematic. A way to combat that is to calculate the cost of cancelling the lease term early versus the cost of having the equipment for the specified period – you may have higher costs than you would have wanted, but it may work out better for you in the long run. And, if you’ve been on good terms with a lessor, you may be able to negotiate more favourable lease terms the second (or third) go-round.
Another potential downside of leasing is that maintenance is up to the lease company’s specifications which may restrict your options. It may take time to get items fixed, which can be a pain – and result in downtime for your company and hurt profits; however, you may run into similar problems when you own equipment too. It’s all down to what works best for your company long-term.
The final con of leasing is product availability. Depending on the company, sometimes there are lots of options, and at other times the brand and model you want may be out of stock or not available with that leasing company. You may have to settle for equipment that isn’t what you wanted. The answer to fixing this problem is shop around. Find a company with equipment and terms that you find favourable.
How Can You Keep Employees Using The Right Assets?
To keep employees using the right assets, talk to them! Ask about their productivity and what equipment they need to increase productivity. It’s down to you to decide what’s truly needed and to weigh up the costs of options: will you get more ROI versus the cost of the asset, or the cost of the lease long-term. But often those working in the jobs understand what you truly need. For example, you may have invested or leased x amount of equipment that is underutilised or not really helpful, so it’s always best to get down on the floor, so to speak, to understand what it is your company needs to run more effectively.
IFRS 16 Is Approaching – Make Sure Your Company Is Compliant
It’s tough to know how to report upcoming leases or what to do with the old ones. We are here to let you know how to achieve compliance in a structured, simplified way. You don’t have to hide in a corner or panic! Download our 7 steps to lease accounting compliance.