Setting up a business is daunting enough. There are so many decisions to make about structure, marketing, planning and so on and so forth. One crucial choice you have to make is about your equipment.
That’s whether to lease your equipment or buy it outright. Whether you need a crane, a point of sales system or a combine harvester, equipment is something your business will come to rely on. So what are the pros and cons of leasing versus buying?
The case for leasing
Businesses that lease equipment – especially equipment that has short life cycles like technology or IT equipment – will keep their equipment up to date more often. Shorter-term leases might make sense for businesses that really need to keep up with their competitors when it comes to technology. Another upside is that it keeps cash flowing and doesn’t require any upfront investment. Better yet, you have predictable or structured payments so you aren’t caught off guard. In some cases, you might be able to claim depreciation and interest on payments.
The case against leasing
You may end up paying more over the lease period than if you bought outright. Leasing is much like a loan with equivalent interest rates. If you bought a $10,000 worth of IT equipment outright you’d have that forever. If you bought a laptop with a lease of 6.55%p.a. and 50% residual, the total payable comes to $10,880. You’ll also have conditions on how you use the equipment in order to keep it maintained to an acceptable standard if or when you have to return it. If your business changes, you’ll also be stuck with equipment you aren’t using until the lease ends.
The case for buying
The case for buying is simple – when you pay for it, it’s yours. If you’re a small business, you can claim up to the new $20,000 limit as a tax deduction. If you take out a chattel mortgage or hire purchase, you can claim the GST on the purchase price on your BAS. You won’t have to worry about maintenance agreements or any other issue because the equipment is yours!
The case against buying
The initial outlay for equipment might be costly for new businesses that need to protect their cash flow as much as possible. If you’re a business that relies on machinery or heavy plant, keeping it until the end of the life cycle may increase your maintenance costs. Before long, you’ll have to shell out for replacements. Like all purchases, you’re eventually stuck with outdated equipment that you’ll have a hard time disposing of.
Implementing a regular program of review to assess whether the current pool of operating assets are efficiently and cost effectively achieving company goals is a must do for all businesses.