When it comes to acquiring essential equipment for your operations, many business owners face the dilemma of whether to buy or lease business assets. There are certain items of equipment, machinery and hardware that are vital to your business’s operation – whether it’s the delivery van for your home-delivery food service or the high-end digital printer for your print business.
When a critical business asset is required, should you buy this item outright or should you lease it and pay in convenient monthly instalments? Depending on your financial situation, it’s important to weigh up the pros and cons of buying or opting for a leasing option.
Buying: the pros and cons
Let’s first look at why you might decide to buy an asset:
- Pro: It’s a tangible asset and builds equity. When you buy an item, you own it outright. It will appear on your balance sheet as one of your business assets. By owning these assets, you increase the perceived capital and overall value of your business. Furthermore, you can often claim the cost of the asset against your capital allowances for tax purposes. For instance, the **Annual Investment Allowance (AIA)** allows businesses to deduct the full cost of qualifying plant and machinery, up to a certain limit, from their profits before tax.
- Pro: It’s yours for the life of the asset. Once you own the item, you have full use of the equipment for its entire lifespan. Your use isn’t reliant on you being able to keep up regular lease payments. If your financial circumstances change, you can sell the asset to free up capital.
- Con: It’s an expensive outlay. Paying for the item upfront is a large expenditure for the business and requires you to have sufficient cash to cover the cost. Spending a large lump sum in this way may divert cash from other crucial areas of the business. As such, you need to be 100% sure this purchase is the right decision and a sound investment.
- Con: You may require extra funding. If you don’t have the liquid cash available to buy the item outright, you may need to take out a loan. Asset finance is available from funding providers but this ties you into a loan agreement that will add to your liabilities as a business, potentially reducing your worth on the balance sheet.
Leasing: the pros and cons
Now, let’s consider the advantages and disadvantages of leasing:
Pros of leasing:
- Pro: Leasing has a cheaper entry point. If the item you need has a large price tag, leasing allows you to use the asset without the upfront cost of buying it in full. For start-ups and smaller businesses with minimal capital, this can make leasing a very attractive option. You may not own the asset, but you can make use of it. This can be the difference between the success or failure of your business.
- Pro: You can spread the cost and manage cash flow. There is still an associated cost of leasing but you can spread it over a longer period, making it easier to find the necessary liquid cash to meet your lease payments. With money saved upfront, you can then invest in other areas of the business. This helps you expand, grow and bring in more customers and revenue.
- Pro: Maintenance and upgrades are often included. Many leasing agreements include maintenance, servicing and even upgrade options, which can reduce unexpected costs and ensure you always have access to the latest technology or best-performing equipment without additional capital outlay.
Cons of leasing:
- Con: You don’t own the asset. There are different types of leasing agreements. Under a finance lease (sometimes called a capital lease), you generally gain effective ownership at the end of the term. However, if you opt for an operating lease, this is typically a more short-term arrangement. You won’t own the asset at the end of the contract. Ownership does have its advantages (including being able to sell off the asset if required). It’s therefore important to consider what kind of leasing agreement you’re entering into.
- Con: You may pay more in the long run. Most leasing agreements will attract additional costs and interest. You may well end up paying more than the market price for your asset, over the long term. While the lower monthly payments might be appealing, if you can cope with the higher overall cost, buying outright may offer greater long-term value.
- Con: You may lose the use of the asset. If you can’t keep up your lease payments (due to poor cash flow, for example), then the owner of the lease agreement may recall the asset. If this item is crucial to your business model, losing this key asset can have a profound impact on your ability to operate. In this respect, leasing carries a degree of operational risk.
- Con: Accounting implications. It’s also worth noting the accounting implications. Under modern accounting standards (like IFRS 16 and FRS 102 for smaller UK companies), most leases are now recognised on your balance sheet as a ‘right-of-use’ asset and a corresponding ‘lease liability.’ This changes the traditional view of operating leases as ‘off-balance sheet’ financing. It’s a key consideration when assessing your financial ratios.
Key factors to consider when deciding
Choosing between buying and leasing isn’t a one-size-fits-all decision. Here are key factors to weigh up:
- Your business’s cash flow and budget: Do you have the upfront capital or do you need to preserve it for other investments?
- The asset’s lifespan and rate of obsolescence: For rapidly evolving technology (e.g., IT equipment), leasing might be better to avoid owning outdated assets. For long-life assets like machinery, buying might be more cost-effective.
- Tax implications: Understand how capital allowances apply to purchases versus how lease payments are treated as operating expenses. This can significantly impact your tax bill.
- Long-term ownership goals: Do you want to own the asset outright or are you comfortable with simply having access to it for a period?
- Maintenance and support needs: Consider if ongoing maintenance, repairs and support are included in the lease or if you’ll need to budget for them separately if you buy.
- Impact on your balance sheet and financial ratios: How will the decision affect your company’s financial reporting and perceived financial health?
Talk to us about whether buying or leasing is the best way forward
Whether you choose to buy or lease business assets, it’s crucial to evaluate your financial situation thoroughly. Our team can help you make that decision. It’s always a good idea to consult with our business advisory team early on in the decision-making process.
We’ll help you review your current financial position, assess your available cash flow and look at your regular cost base to decide whether buying or leasing is the right thing for your business. Our expertise extends to comprehensive tax planning strategies designed to optimise your financial position.
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Alternatively, call us on 0161 761 5231 or email us at theteam@horsfield-smith.co.uk.
