Why Lease As A Business?
John likes cars. He always has done. Towards the final furlong of his career and at a stage in his personal life where he suddenly has exponentially more disposable income, he has his eye on a luxury car he’s always dreamed of owning.
After a few visits to the showroom and maybe even a 24-hour test drive, he sits down with his wife to decide whether they can afford tko buy it. He’s always wanted one and he could trade in his already paid for and still half-decent saloon, and this would knock a good chunk off the sale price. This would mean he’s borrowing less from the bank.
Or his current car could even act as a whacking, great, big deposit if he went down the hire purchase agreement route that the salesman worked out for him.
After 60 monthly payments, he could own the car if he made the final balloon payment. It looks a big amount, but by then, according to the salesman, he could refinance the vehicle for another three years, at which point John and his wife will be ready for downsizing their home. Cash won’t be a problem then and the car will be officially his.
Or, if it holds its value as they think it will, he’d be more or less even with what he owes the finance company and could just walk away, handing the keys back to the dealership and losing maybe a few hundred pounds for wear and tear.
It sounds like a nice way to mosey on through to retirement to John. And he’ll probably enjoy the car just as much as he’s always thought he would.
He should have options too, provided that it all goes to plan. So long as they get the value for their house that they expect and nothing unexpected happens in the meantime such as their youngest getting married or the eldest having another grandchild.
But there’s that meeting he was in a few weeks ago, where John just got a sense that the long-awaited takeover was happening. But what would that mean for all the team at his site if they merged with the big German outfit? Would it mean early retirement in the form of a redundancy or staying for another couple of years?
He can afford the monthly expense for the sports car, though. He knows that.
So, he decides to look into leasing one for a while, to see how much he really likes it and until everything settles down at work. He manages to find a lease agreement for less than the hire-purchase price, he’s only tied in for 2 years, and all maintenance and servicing is included.
Yes, it’s not brand new and it’s not his own, but he’s still testing the water and he can assess the financial state of play once again in a year's time.
If you’re wondering why to lease as a business, or why so many other businesses are using this method of asset acquisition, then John’s story shows precisely why:
- You can gain access to a premium quality asset without the financial commitment and risk of ownership.
- The tricky decision of what to do with an asset once its value has greatly diminished a few years down the line is not your problem.
- Maintenance and servicing are covered as part of the price you pay.
- If your business’s circumstances change, you are only tied in until the end of your agreed lease agreement duration.
- If you need to scale up your lease agreement due to business expansion, you’re already in a favourable negotiating position with the providers as a current customer.
Flexibility is key to business and all of the above shows your answer to the question “Why lease as a business?”
So why would anyone purchase assets outright if leasing is so beneficial?
The Benefits Of Purchasing Over Leasing
Whereas the initial monthly payment term of John’s lease of a sports car was on a par with the loan repayments, that is where the analogy with your business falls down. In a business case, the lease agreements are likely to span years and years, with many long-term lease agreements, for assets such as heavy plant and machinery, stretching into the decades rather than months.
This can mean that the overall monetary sum paid by the lessee is actually greater than the value of the item at the outset of the agreement.
Also, there is a financial implication to using leased assets because as the business does not actually own them so they cannot be used as security for extending lines of credit.
When you have purchased the assets instead, however, all of the above does not necessarily apply. You may have borrowed to purchase the asset and the lender may have a security over the asset or indeed the whole business. Though, as a paradox which is typical of the business world, whilst some companies may want their capital tied up in assets which they own, others will want the flexibility offered by an operation utilising a large lease portfolio.
So, Why Lease Instead Of Buy?
Many lease vs. buy decisions will depend on the asset you are considering purchasing or leasing, and what the medium to long-term financial plan is for your business.
If you know the asset will not need to be replaced before its value has diminished past the point of no return or you are cash rich and now is a good time to spend, spend, spend: it’s likely purchasing is right for you.
However, if you are like most other businesses in the world and prefer to keep your options open and your cash management more certain, leasing is probably the way to go.
And it’s surprising what can be leased for your business. Everything from cash machines to cars and from planes to printers can be leased. Whole airlines are run and profitable without owning a single aircraft.
Get a firmer understanding of what’s involved with leasing, what the pros and cons are and how the leasing industry is changing in this free guide: