In the course of running a business, there is generally a requirement for specific equipment to operate, whether it be company vehicles, plant and machinery, IT hardware or so on. As you grow, the number of assets you need will likely increase so that you can meet rising demand and give your expanding workforce the tools they need to succeed.
Acquiring new assets for your business comes with a choice: buy or lease. Buying is the traditional choice, allowing you to secure ownership of the object you need in one fell swoop. However, it can also be a costly investment, depending on what you are purchasing. This is why leasing and hire-purchase rose to popularity in the 20th century, allowing people to obtain the goods they wanted without paying the full amount upfront.
Many people still have a preference about whether they buy or lease assets, which dictates their decision. However, leasing has grown in acceptance over the years, with more businesses selecting this option. Whatever you pick, it’s essential to be aware of the ins and out of buying and leasing so you can make the right choice.
Below, we have examined the pros and cons of buying versus leasing assets, including company vehicles and equipment, so that you can make an informed decision for your business.
Buying
Buying assets happens exactly as you expect it would: you choose the products you want and pay for them in full. Ownership comes with this payment. We’ve explored the pros and cons below.
Pros
The main advantage of paying for your assets in full is that once you’ve bought them, they are yours for life. There’s no need to incur any debt or interest. Once they are yours, you can do whatever you would like with the equipment without having to answer to anyone else. The payment is clearly complete from day 1, rather than months or years down the line.
If you are experiencing cash flow issues or no longer need your assets, you have the option to sell them on. Any money from this sale will be entirely yours.
Buying outright will also increase the value of your business by adding more assets to your balance sheet, although you are depleting cash to do this. This may make it easier to attract financing if you need it in the future. In some instances, your assets can be used as collateral to secure a loan and help you to leverage funding for your company.
There are also alternative options to make buying more affordable, such as searching for second-hand equipment, if this is viable for your business.
Generally, if you are seeking equipment which you intend to use for a long time, without the need to upgrade or change it, it’s best to buy it. This will give you continued access to the asset for the long-term.
Cons
Alongside the benefits, there are some clear downsides to buying assets. Firstly, it can be a hefty hit to your cashflow to pay for something upfront, especially with company vehicles or plant and machinery. In some instances business owners may choose to take out loans to cover the cost, which still puts debt on their balance sheet, similarly to leasing.
Another consideration is that once you’ve made your purchase that is it, you can’t change your mind about it post-purchase. For example, if you own something for a year and then a newer model comes out, you won’t be able to simply swap it for the latest version: you would need to sell your existing equipment, although trading it in could be an option, and purchase the next one. It’s also worth noting that the value of assets is likely to drop over time and typically this is shown through depreciation in your accounts.
You will also be responsible for the maintenance and upkeep of your assets, including any costs, which can further increase the investment required. Some suppliers may be able to provide cost-effective maintenance packages or even free support that enables you to troubleshoot and keep equipment working in top condition.
Leasing
When leasing an asset, you receive the items in question in exchange for a regular repayment plan. In leasing, once you have paid the balance, you can choose to pay a minimal amount to acquire the title to the product or continue to lease it. With hire-purchase, you will own the asset at the end of the term.
Pros
The most significant benefit of leasing is that it makes it more affordable to obtain the assets you need to operate. By spreading out payments, there is less pressure on your cash flow, and you do not need to cover the total cost straight away. The instalments are regular and predictable, meaning you can budget for it each month or quarter to prevent defaulting on payments.
It may also be possible to access additional perks, such as finding a contract that includes maintenance of the asset. This will further reduce the costs and effort required by you, making it easier to keep the item in pristine condition and optimise its use in your business.
Finally, leasing an item means you’re not tied in forever. While hire-purchase will give you the option to own the product if you wish to, you could instead choose to return the equipment or upgrade to a newer version at the end of the contract, depending on your needs. You can also negotiate a timeframe that works for you (for example, if you only need the asset short-term). However, a shorter loan term will likely lead to higher instalments.
In this sense, leasing is best for the occasions where you aren’t sure how long you will require the equipment – for example, if you’re unsure of business demand or may need to switch to an alternative asset in the near future. Due to the temporariness of leasing, it’s perfect for testing out equipment before you fully commit.
It’s also great for products which are constantly redeveloped to provide newer ‘models’, so you’re not tied into an old version.
Cons
While leasing can make purchasing assets more affordable by spreading out the cost, it can work out more expensive once interest is factored in. This means you will ultimately end up paying more than if you had bought the equipment outright at the beginning.
The asset is also never entirely yours (unless you go down the hire-purchase route), which means it will not sit as an asset in your balance sheet. There might also be consequences if you damage the item, such as additional fees.
It’s also worth noting that you still have to put down a deposit when leasing or hire purchasing an item, which will need to be paid upfront, so you must have enough capital for this.
What to do if you choose to lease
If you decide that leasing (or hire purchase) is the best option for you, you must consider a few things to make sure you’re getting the best deal. We’ve listed the steps below.
- Choose leasing or hire-purchase. The first step to finding a suitable contract for your business is to decide if you want to utilise leasing or hire-purchase. Leasing only secures the item for the length of the contract (at which point you are free to begin a new agreement on a different asset), while hire-purchase gives you the option to own it at the end if you want that possibility.
- Shop around. Once you have decided what you want, look at suppliers to find the most competitive deal. Different leasing suppliers will offer various prices and terms, so shopping around will enable you to compare and contrast. In some cases, the provider of your chosen asset may have a preferred finance company that it works with to offer leasing, which could limit your options; however, you should still be shop around to be confident that you’re getting a good deal.
- Be sure you can afford repayments. While leasing may seem more affordable than buying assets outright, you must meet your payment schedule consistently. If you don’t, you risk falling into debt and having the goods seized, which will harm your business more in the long run. So, make sure you can comfortably keep up with repayments before you commit.
Conclusion
There are unique advantages and considerations associated with leasing and buying, which are essential to weigh up before deciding which route to take.
While many companies will still choose to buy their assets to ensure full ownership, leasing is an excellent alternative for those who do not have the funds to purchase outright or who wish for more flexibility when it comes to payment. There are also additional benefits, like being able to change assets more frequently and getting support in the upkeep of your goods.
Whichever choice you do make, you must ensure it aligns with your business requirements. This will help you get the equipment you need to operate and grow without falling into the trap of cashflow issues.
If you are considering leasing or hire-purchase for your business, we can take you through the ins and outs and find relevant lenders to enable you to secure the assets you need.