1. You Own the Asset
This is the most obvious benefit of buying versus leasing. When you purchase equipment outright, it’s yours. There are no terms and conditions that stipulate its return date.
2. (Sometimes) More Cost Effective
Depending on the amount of time you lease a product, it could be more cost effective to purchase it.
For example, let’s say a construction company owner purchased a brand new mini excavator for $150k (interest included) and owned it for five years, using it for 250 days per year. It’s a large investment, even if bought on hire purchase. The cost per day ends up being only $120.
3. Tax Efficiency
When you purchase goods and services, you are often required to pay GST on it. Later, you may be eliigable to claim input tax credit on the GST paid on your purchases. Similarly when you purchase any equipment for your business, you will pay the applicable GST rate. This GST paid can be claimed as credit at tax time.
The Cons of Buying Equipment
1. Less Flexible Cash flow
Purchasing equipment outright normally requires a more significant amount of capital to be paid up front, which can put pressure on your business' cash flow. Tying up a large amount of money in a purchase can reduce the amount of working capital available, at least in the short term.
A lack of funds can leave the business vulnerable to any drops in financial projections. For example, if projections for the upcoming month aren’t as high, any buffer of cash that was available will shrink.
2. Purchases Financed by Debt
Due to the higher upfront cost of purchasing equipment, it may have to be financed by debt in the form of a loan or overdraft.
Loans can have a negative impact on your business credit file, at least in the short term, which may impact your ability to be accepted for financial services in the future. In some cases, financial institutions can demand increased repayments at short notice as well as withdrawing overdraft limits.
3. Whatever You Own You Have to Maintain
Similar to the difference between being a rental tenant and a homeowner, when you own equipment you are responsible for the maintenance, which can sometimes be a significant additional expense.
Also, maintenance issues can be sporadic and can cause a huge spike in expenditure at very short notice, making it harder to plan ahead financially.
Once you purchase equipment, new or used, it is nigh on impossible to sell it on for near the original price you bought it at.
Unfortunately, the item's depreciation could mean that the purchase of the equipment along with the value it helped to create could put you at a loss when it comes time to sell.
5. Expensive Upgrades
Once you own an item, the cost of upgrading it becomes very expensive. For example, if there was a change in your industry which rendered an item you purchased obsolete, you’d then likely have to invest a significant amount of money to purchase it again.
1. Better Cash Flow
Leasing enables businesses to put up less cash up front and spread the cost much easier over a set amount of time, which helps businesses to have a better cash flow as the amount of working capital needed is lower. The predictable monthly costs make it easier to plan ahead financially.
2. Access to Better Equipment
For many businesses, leasing is the more cost effective option when purchasing. They not only have access to better equipment, but also more value for their money.
3. Lower Maintenance Costs
As the item doesn’t belong to you, you won’t have to panic if there is a breakdown. You can financially plan ahead with more confidence.
4. More Cost Effective Upgrades
When equipment is leased, it’s far easier to upgrade it. In most cases, you only need to contact your supplier, explain which item you’d like to upgrade, and agree on a new monthly fixed payment.
Subsequently, businesses can be confident that they can quickly adapt their equipment in line with any trends, giving them a competitive advantage over some that make a purchase outright instead.
5. Tax Efficient
The monthly costs of leasing can usually be deducted from taxable income, reducing your tax liability, which helps to offset the potential issue of a lease costing more than purchasing over time.
Things you should consider when Leasing Equipment
1. You Don’t Own it
2. (Sometimes) Less Cost Effective
The benefits of spreading the cost comes with paying a little more over the course of the lease.
Should You Lease or Buy Equipment for Your Business?
For smaller businesses with less financial backing, leasing is the better overall option. There is a trade off of course, not owning the equipment and potentially paying more in some cases. However, when compared to putting pressure on cash flow, going into debt to finance the purchase and being liable for any repair and maintenance costs, leasing equipment for many businesses makes better business sense.
Leasing enables companies to be more financially flexible and in a stronger position to remain competitive.
Enjoy the Benefits of Leasing with GRENKE
Running a business is hard work.
That’s why GRENKE makes the process of leasing equipment needed for your business to flourish a simple, frictionless one.
We adapt to your specific business needs meaning that no matter your region, industry or other personal circumstances you can get the exact equipment you need, quickly and cost effectively. If you're ready to take the next step in your finance journey, talk to us today.