21 Sept

Should you buy or lease your business assets?

We can review your financial position, cash flow and cost base to help determine whether buying or leasing is the right approach for your business.

There are certain items of equipment, machinery and hardware that are essential to the operation of your business – whether it’s the delivery van you use to run your home-delivery food service, or the high-end digital printer you need to run your print business.

But when a critical business asset is required, should you buy the item outright, or lease it and pay for it over time?

To buy or to lease?

Buying new business equipment, plant, machinery or vehicles can be a significant investment.

Depending on your financial position, it is important to weigh up the pros and cons of buying outright against leasing or financing the asset.

Buying: the pros and cons

Pro: It’s a tangible asset

When you buy an item, you own it outright and it will generally appear on your balance sheet as a business asset.

You may also be able to claim deductions for the cost of the asset over time, or potentially access the instant asset write-off, depending on the asset and your eligibility.

Pro: It’s yours for the life of the asset

Once you own the item, you have full use of the equipment for the life of the asset.

Your use of the asset is not reliant on continuing lease payments and, if your financial circumstances change, you may also be able to sell the asset to free up capital.

Con: It can be an expensive outlay

Paying for the item upfront can be a large cash outlay for the business.

Spending a significant lump sum in this way may take cash away from other areas of the business, so it is important to consider the impact on your business cash flow before proceeding.

Con: You may require extra funding

If you do not have the available cash to buy the item outright, you may need to obtain asset or business finance.

Finance can allow you to preserve working capital, but it also introduces interest costs and ongoing repayments that need to be factored into your broader financial position.

Leasing: the pros and cons

Pro: Leasing has a cheaper entry point

If the item you need has a large price tag, leasing can allow you to use the asset without paying the full purchase price upfront.

For start-ups and smaller businesses with limited capital, this can make leasing an attractive option.

You may not own the asset outright, but you can still make use of it while preserving cash for other areas of the business.

Pro: You can spread the cost

There is still a cost associated with leasing, but spreading the payments over a longer period can make the expense easier to manage.

The cash retained can then be used elsewhere in the business, including funding growth, employing staff, marketing or reducing debt.

Con: You may not own the asset

There are different types of leasing and finance arrangements, and the ownership outcome will depend on the agreement.

Different arrangements can also have different accounting, GST and business tax deduction consequences, so it is important to understand the terms before entering into the agreement.

Con: You may pay more in the long run

Most leasing and finance arrangements involve interest, finance charges or other costs.

As a result, you may pay more over the life of the agreement than if you had purchased the asset outright.

The key is to compare the total cost, cash-flow impact and tax position, rather than looking only at the monthly repayment.

Con: You may lose the use of the asset

If you cannot keep up with your required repayments, there may be consequences under the finance or lease agreement.

If the asset is critical to your business operations, this can have a significant impact on your ability to continue trading.

What should you consider?

Before deciding whether to buy or lease, consider:

your available cash;
the effect on cash flow;
finance and interest costs;
how long you expect to use the asset;
GST and income tax treatment;
available tax concessions;
the effect on your borrowing capacity; and
the total after-tax cost of each option.

For business vehicles, there may also be additional considerations around motor vehicle deductions and record keeping, as well as specific rules for luxury vehicles.

Contact us

Talk to us about whether buying or leasing is the best way forward.

The decision is not always straightforward, so it can be worthwhile speaking with your accountant before committing to a significant asset purchase.

We can review your current financial position, assess your available cash flow and cost base, and compare the financial and tax implications of buying versus leasing.

Contact PRATT Partners to discuss the right approach for your business.