It may not be an easy decision whether to buy or lease business equipment, but it is well worth it to investigate and then see whether one option or the other could be financially advantageous. For small businesses, every dollar counts.
To start with, it depends on whether you have the cash to be able to afford to buy the equipment. You know how much cash flow you need to run your business, and you have to make sure that cash flow is in place (or look into a business loan) to make decisions on buying equipment that may be really expensive.
If you do have the cash flow (meaning that your business has established itself and is at least a few years old), buying equipment outright may be a smarter financial decision than leasing.
So, how do you decide?
The benefits of leasing
If you’re a small business owner, it can be wise to lease equipment. You may not even have to pay a large down payment, if any at all; and as mentioned above, this means that it does not affect your cash flow.
Another benefit is that you can deduct the lease payments from your assessable income. Equipment is a business expense that contributes to you earning an income, so the ATO allows costs associated with it to be deducted.
What else? Depreciation of equipment is complex, and has to be included in your tax returns. So, leasing saves you from having to do that.
One of the biggest pluses is in terms of technology, which never stops advancing. What if you buy something that ends up obsolete, or without the newest features that you want, after only a few years? You’d have trouble selling the old equipment, or have to sell it at a big loss. But if you’re leasing, you can just upgrade to the latest model.
The benefits of buying
There are a few different advantages to buying equipment, which are pretty much the flipside of what’s discussed above:
- If you have a leasing contract, if your circumstance changes and you need to break the contract, you probably will have to pay a penalty, which could be sizeable.
- The equipment is yours, so you can do with it what you need to, i.e. make upgrades or modifications.
- You can sell or get rid of the equipment at any time; it’s your choice.
- You don’t have to deal with contracts and agreements; you just buy what you want. This is also important because with leasing, you are limited to what the leasers are offering.
- Something you probably wouldn’t think of is that equipment is considered as a business asset, and your assets can help you get business loans if you need them.
Weighing up the costs and benefits
So, how are you going to do a balance sheet for weighing the costs and benefits of buying or leasing equipment? Some key questions:
- What are the monetary costs, over time, of leasing equipment?
- What is the expected life and utility of that equipment? If you buy the equipment outright, then what is its net value?
Every year there will be costs involved, such as insurance, maintenance and repairs, and these costs will increase each year of the asset’s life.
You might be required to dispose of the equipment in a particular way, which might incur costs, and there might also be costs involved with replacing the equipment.
Then you want to look at the particular technology involved. Is it likely to become obsolete right away? How long will it maintain its value? Will you be able to resell it after a few years, if you desire?
Loans, tax deductions and depreciation
The costs of getting a loan might also figure in the equation, if you’re planning on using a loan to buy equipment. Talk with your lender about what the terms of the loan would be, if they require a down payment, and how to ensure you have enough cash flow for repayments.
While we mentioned that you can deduct the costs of leasing from your taxes, you also can claim benefits if you buy equipment. The new depreciation rules from the Australian Taxation Office have been simplified. If your equipment costs less than A$1000, you can write it off immediately. If it was more expensive than that, different arrangements apply: 15% depreciation in Year 1, and 30% in the years after that.
Update: Until 30 June 2019 you can use the instant asset write off to immediately deduct business asset purchases of up to $20,000.
If you’re still confused, it’s because there’s no one answer that applies to everyone. You need to assess your business and your cash flow. Then you need to look at the particular kind of equipment you are considering. You might need to consult with experts to get the information you need, working with your accountant to know the numbers for your own business, asking experts on, for example, computers, or photocopiers about the advantages or disadvantages of renting and leasing, and particularly, how quickly technology is moving in that area.
As a summary, here are the key issues for you to consider:
- The cost of buying the equipment, including costs associated with a business loan.
- The cost of leasing the equipment
- Costs of maintenance and repair
- Tax deductions for buying or leasing
- Potential resale value
- Potential revenue derived from using the equipment
- How quickly the technology will become obsolete
- The convenience of being able to upgrade easily and not do maintenance and repair (from leasing)
- The convenience of increased decision-power for upgrading, selling or disposing, and choosing the exact model you want (from buying)
Do you need a loan to buy equipment, or to improve your cash flow? We’ll guide you through all of your options and make sure you get the best business loan to suit your needs. Apply now.