When you are setting up a new business or scaling your existing operations, you often need assets to meet demand and serve your customers. This could include company vehicles, machinery or other equipment you need to perform.
The problem is that acquiring such assets is usually expensive. If you don’t have enough liquidity, it can strain your cash flow or prevent you from being able to afford it at all. You need a solution that enables you to access the tools you need without the cost implications.
This is where leasing and hire-purchase comes in. With both options, you can secure the assets you need without paying the total cost up-front. Instead, you take on monthly repayments over a set timeframe. In the case of hire-purchase, you will own the asset at the end of the period, provided the entire balance has been paid, however it may still show on your balance sheet from day one.
Leasing and hire-purchase are becoming increasingly popular in business. There are many advantages for those who cannot afford to purchase resources outright, helping them manage the payment while still achieving goals.
Below, we’ve listed the most significant benefits associated with leasing and hire-purchase and the factors to consider before you utilise them.
The benefits of leasing
It facilitates expansion
Often, it is when you are trying to grow as a business that the need for more equipment emerges. If you aim to serve more customers or fulfil more orders, you need adequate tooling or equipment to do so. Achieving these growth goals requires investment that some businesses simply may not have up-front.
By utilising leasing, you can purchase the equipment you need to start scaling your production and services. This means you don’t have to wait to serve more customers and focus on generating sales instead.
It reduces the pressure on cash flow
As we’ve already mentioned, purchasing assets can be expensive, especially if you need to buy multiple at once. Few small businesses will have the capital they need waiting in their bank accounts, and if they do, it will be a sizeable detraction from their finances. This, in turn, can reduce liquidity, making it harder to keep up with your regular expenses.
If you choose to lease your equipment instead, your expenses will be broken down into smaller, regular instalments that are easier to manage. This reduces the pressure on cash flow, enabling you to meet monthly payments alongside your other outgoing costs. It will also minimise the financial gap while you wait for your new assets to bring in increased revenue.
It can give you access to higher-value equipment
When selecting equipment to buy for your company, you might find yourself restricted by your affordability. If you do not have sufficient funds available, you may have to go for lower-priced models even when higher-value options might offer a better return on investment.
As leasing and hire-purchase take away the need to fund the equipment immediately, there’s more room for manoeuvre when choosing your new asset. In some cases, you may be able to afford a more expensive solution when the cost is broken down into monthly payments. Just remember to do your maths and make sure you can afford the instalments continually.
It can offer additional perks
When you take out a leasing contract with a provider, there may be additional advantages on top of the asset they assisting you to purchase. Examples include maintenance and warranty, which can ensure your equipment stays in top condition. These can also offer peace of mind in case something should go wrong.
If these services are offered complimentarily with your contract, it can increase the value you are getting and prevent additional costs if you would have had to take out a separate maintenance contract. However, be sure to check that there are no hidden fees associated with the services that may heighten the strain on your finances.
It offers flexibility
In the case of leasing, you will be given the option at the end of the leasing period as to whether you want ownership of the asset to be transferred to you (provided the debt is paid in total). The alternative is that the contract ends and the equipment is returned.
If you choose to end the contract, you are free to switch to a new contract, perhaps on a more recent or better version. This can prevent you from getting tied to a particular product if you bought it outright and remove the need to sell it before investing in something new. As such, you can access the latest solutions for your plant on a relatively regular basis (depending on the length of your leasing contract).
If you are happy with the equipment you’ve been using, you can decide to become the owner of it instead, allowing you to retain your assets without having to carry on with monthly instalments. Generally, you will pay a modest fee to acquire the asset.
Things to consider
Although there are many benefits to leasing or hiring equipment, there are factors to consider to make sure it’s the right option for you.
While leasing can make buying assets more manageable with instalments, you will often end up paying more than if you have bought the product outright in the first place, and this is the trade off in your cashflow. This is due to interest and other fees associated with your contract, however it can be possible to negotiate better terms which could reduce these additional costs. It’s vital to ensure you can afford the overall price and happy to take on the additional expenses. It is worth noting that VAT will be due on monthly payments, which will be recoverable, if you are VAT registered.
Your contract may also have clauses relating to product damage. If something should happen to it while it is in place of your business, you might need to pay to put it right. It might also prevent the leasing company from taking back the asset at the end of the contract until you pay the additional costs. Always make sure that your insurance covers all your fixed assets.
Finally, a leasing contract ties you into the agreement for a set period. This usually varies from 1 year to 5 years, depending on the asset you are securing. For this time, you are bound to the agreement, including the repayment schedule. If you change your mind or decide to purchase a different solution before the contract end date, you might find you have limited scope. There are often penalties if you want to exit the lease early, leaving you to foot extra costs.
Conclusion
Utilising leasing or hire-purchase can open up many possibilities for your business, enabling you to hit your growth targets and expand your operations. It will also help you to manage your cash flow better. However, it is essential to understand the implications and be sure it is right for you.
If you need advice on whether leasing could benefit your business, we are here to help. Our team of advisors can discuss how it works and identify the best option for your unique requirements.