Buying or Leasing Business Assets – Which Is Right for You?
An Important Business Decision
From vehicles and machinery to computers and specialist equipment, most businesses eventually need to invest in assets to operate efficiently or support growth.
But when the next major purchase comes along, there is an important question to consider:
Should you buy the asset or lease it?
There isn't one answer that suits every business. The right decision depends on your cash position, the type of asset, how long you'll need it and the overall cost of each option.
Buying: The Advantages
Buying an asset gives your business ownership and control.
Once purchased, you can generally use the asset for as long as it remains useful to the business. You also have the flexibility to sell or replace it when your circumstances change.
Depending on the asset and your circumstances, there may also be tax deductions available for depreciation or an immediate deduction under applicable tax rules.
Ownership can be particularly attractive for assets that have a long useful life and are unlikely to become obsolete quickly.
Buying: The Disadvantages
The obvious downside is the upfront cost.
Paying $50,000 for a piece of equipment, for example, means $50,000 is no longer available to pay suppliers, employ staff, fund inventory or pursue another opportunity.
Even a profitable business can experience cash flow problems if too much working capital becomes tied up in assets.
If you need to borrow to fund the purchase, you'll also need to consider interest, repayments and the impact of the additional debt on the business.
Leasing: The Advantages
Leasing can provide access to the equipment your business needs without a substantial upfront cash payment.
Instead, the cost is generally spread over an agreed period through regular payments.
This can help preserve working capital and make cash flow more predictable.
Leasing may also be attractive for technology and other assets that become outdated relatively quickly, where regularly upgrading equipment is important to the business.
Leasing: The Disadvantages
A lower upfront cost doesn't necessarily mean a lower overall cost.
Interest, finance charges and other fees can mean you ultimately pay more over the life of the arrangement than you would have paid by purchasing the asset outright.
You also need to understand what happens at the end of the agreement.
Depending on the arrangement, you may not own the asset and there may be conditions or additional costs associated with retaining, returning or replacing it.
Don't Compare the Monthly Payment Alone
This is where businesses can make the wrong comparison.
A relatively small monthly lease payment may look more attractive than a large purchase price, but that doesn't tell you which option provides the better financial outcome.
A proper comparison should consider:
Upfront cash required
Total payments over the agreement
Interest and finance costs
Tax deductions
GST implications
Impact on working capital
Expected useful life of the asset
Residual or resale value
How quickly the asset may become obsolete
Whether ownership is important to the business
What Is Right for Your Business?
If preserving cash is the priority, leasing or financing may be attractive.
If the business has strong cash reserves and the asset will remain useful for many years, purchasing may provide better long-term value.
The important point is to assess the decision in the context of your whole financial position, rather than simply choosing whichever option has the lowest immediate cost.
At Lockwood & Ward, we can review your cash flow, financial position and the total cost of each option to help determine whether buying, financing or leasing makes the most sense for your business.
Planning a significant business asset purchase? Speak to our team before you sign.
Lockwood and Ward Pty Limited | ABN 76 113 938 373Level 9, 50 Clarence Street, Sydney NSW 2000 | Tel: (02) 9299 7044
