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Should you lease or buy assets?

Findingmoneyfortheessentialassetsyou’llneedtorunyourbusinessefficientlycanbeachallenge.You’llneedtodecidewhetherleasingorbuyingisbestforyourbusiness.

Is borrowing money essential?

Whetheryouneedtopurchaseavehicle,somecomputerequipment,orabiggerwarehousetoexpandyourbusinessortooperatemoreeffectively,takethetimetoconsiderhoweachpurchasemightimpactyouroperatingcapital.

Think about whether leasing is the way forward. If you decide to lease an asset, you won’t have to hand over a large chunk of your business’s cash. That cash could maintain your reserves, be used to invest in more stock, or to develop a new product or service.

Sitdownandcalculatethepotentialimpacttoyourbusiness’scashflowifyouwereto:Bymakingloanrepaymentsovertime,you’llbeabletopayoffalargercapitalpurchasethatmayhavebeenimpossibletoaffordwithcash.

Paying loan installments can also make it easier to afford the assets your business needs without stripping it of its available funds.

Choosing to buy new or secondhand

Italwayspaystodoyourduediligencebeforeyousignapurchaseagreementforanynewbusinessassets.Forexample,thecostofmachineryandequipmentcanvaryenormously,soit’sworthwhilecomparingpricesofdifferentbrands,manufacturersandsuppliers.

If you know that the quality of an asset will play an integral role in your overall business success, it’s probably a wise idea to purchase it brand new. Just keep in mind that you might not always be able to claim the entire amount paid as a business expense – the values of some assets are depreciated over several years.

Buyingsecondhandoffersawayofreducingyourbusinessexpenses.Takethetimetoshoparoundtoseewhetheryoucanlocateauseditemingoodconditionthatwillbereliable.

Deciding to lease or buy

Whenyouleaseanasset,you’resimplyrentingitforasetperiodoftime.Theleasingcompanyretainsownershipoftheassetwhileyourbusinesshastheexclusiveuseofitforthetermofthelease.

A lease will typically run for anything between 24 and 60 months. Once the agreement is entered into, both parties are obligated to see out the term of the lease.

Throughoutthecourseoftheleaseagreement,you’llpaythelenderregularinstallmentpaymentsfortherighttousethatasset.Foraccountingandbookkeepingpurposes,someleasescanbeclassifiedinthesamewayasanassetpurchaseandcanbecapitalisedonyourbalancesheet.

However, purchasing your own asset can be a cheaper option in the long run. For example, if a printer costs $5,000 and is leased to your business at a monthly rate of $200 over 3 years, once the lease period is up, you’ve paid $7,200 – and you don’t even own the asset.

Important questions to consider

Beforedecidingwhethertobuyorlease,it’sprudenttotakeafewimportantfactorsintoaccount,suchas:
  • How long will you need the asset for? Is it for a short-term project?
  • Is it cost effective? Will the extra business you make cover the expense of leasing or purchasing?
  • Will the asset become outdated in the near future? For example, signing a five year lease on a computer that will become obsolete in three years doesn’t make much sense.
  • What are your current financial priorities? Are there other purchases that should be made first?

Upgrades and maintenance costs

Incaseswheretechnologyischangingrapidly,youmightprefertoleasetheassetyourbusinessneedsinsteadofbuyingit.Therearealsooptionswheretheleaseagreementcanincludeupgradingtheassettoanewermodeloncetheagreementexpires.

Likewise, some lease agreements may also include maintenance and servicing costs. By leasing some assets, you could avoid paying any upkeep costs associated with them, saving your business money over the long term.

It’simportanttolookcloselyatanyleaseagreementbeforeyousignit.Youmayfindthatsomeagreements:
  • Give you the opportunity to purchase the asset at a reduced cost when the lease expires.
  • Allow you to exchange the asset and upgrade to a newer model when the lease expires – as long as you enter into a new agreement at the same time.
Alwaysbesurethatyouunderstandthetermsofanagreementbeforeyousignit.It’salsosmarttorunacostcomparisonandacashflowanalysisbetweenleasinganassetandbuyingonewithfundsfromasmallbusinessloan.

Ways to fund your asset purchase

Therearealwaysdifferentoptionsavailableforfundingyourbusiness’sassetpurchases,including:
  • Outlaying cash or capital you have within your business.
  • Using a small business loan.
  • Employing a revolving line of credit.
  • Entering into a lease agreement to help fund the acquisition.

Summary

Ifyoudecidetobuy,alwayscheckwithyouraccountantaboutanyplannedbusinessassetpurchases.Discussthepotentialimpactthepurchasemayhaveonyourcashflowandaskwhatalternativeoptionsmightbeavailable.

Next steps

  • Sit down with your accountant to discuss the cash flow implications of purchasing new or secondhand business assets.
  • Speak with your bank manager about funding options for new assets.


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