When to lease equipment and when to buy it

Equipment costs can make a large dent in the budget of a small business. So, is it better to lease or buy what you need to operate?

Given the circumstances of every business differ, there’s no simple answer to the lease or buy conundrum. But it’s worth considering the upsides and downsides of each before making a decision.

For example, if you work in construction, you need a lot of equipment, from diggers and bulldozers to grabs and grapples. Owning your equipment outright means that your operators can get used to specific machines – rather than learning the quirks of new ones each job. The equipment is always available and it becomes a business asset, without the ongoing costs of leasing.

On the flip side, if your workload is irregular, leasing can be far more cost effective. It may also enable you to get better and more equipment than you can afford outright, and the leasing company typically handles maintenance, storage and transportation.

General pros and cons that apply to most small businesses include:

Leasing Pros

  • Little or no upfront outlay, which means less impact on cash flow
  • Payments are usually tax deductible
  • No worries about depreciating assets
  • It’s easier to keep your equipment up-to-date
  • Maintenance is not your responsibility
  • Your monthly costs are predictable
  • Expensive technology is more accessible

Leasing Cons

  • There can be large penalties for breaking leasing contracts
  • You’ll pay more over the long term
  • The lease may require you to maintain equipment according to the leasing company's specifications, which can be costly

Buying Pros

  • After initial outlay, the equipment is yours
  • You have an asset, which could be useful if you need a loan or wish to sell your business
  • You may be able to rent the equipment out when you’re not using it
  • You can write off the purchase and depreciation costs
  • You determine your own maintenance schedule

Buying Cons

  • It can be prohibitively expensive
  • You may need financing, which will involve time-consuming paperwork (and paying interest)
  • It’s hard to upgrade without significant costs
  • You may end up stuck with outdated equipment that’s worthless

Consider the tax implications

Max Newnham is a partner at TaxBiz Australia and the author of Tax for Small Business: A Survival Guide. He is generally a fan of leasing over buying because it avoids a large cash outlay.

“It’s all about cash flow for most businesses,” says Newnham. “Having your cash tied up in an asset means that you will have to find [more] cash down the line to pay tax on your business profits,” he says.

“If you’re not getting an immediate deduction for assets that you’re buying, then you will have used profits to buy that asset but those profits will not be offset by a tax deduction. If, instead of paying for an asset, you financed it, that cash is still liquid, and you have tax-deductible lease repayments too.”

The $20,000 instant write-off party is ending

 “Up until June 30, 2018, qualifying small businesses can buy business assets up to $20,000 and get an immediate deduction,” says Newnham. However, this will change from July 1, 2018. “I believe it will drop back to $1,000,” he predicts.

“If I had a client who was going to buy something for $18,000 before then, I’d say do it on a hire purchase and get the double whammy. You’ll still have your $18,000 cash, but because it’s under $20,000 you’ll get the instant tax deduction, which is an optimal outcome.”

Learn more about the instant asset write-off here. You can also find more information about tax and depreciating business assets here.

“The question, from an insurance perspective, is who owns it or is responsible for its value or any damage to third parties if something goes wrong” 

Protect your business assets

Whether buying or leasing, it’s essential that your assets are properly insured in the event of loss, theft, breakdown or for any loss of income that may result should the equipment be out of commission. 

“The question, from an insurance perspective, is who owns it or is responsible for its value or any damage to third parties if something goes wrong,” says John Clark, Steadfast Broker Support Manager.

“If leasing, understand the contract you’ve entered into and what you’re liable for,” says Clark. Clark advises business owners to be particularly alert to anything in a leasing agreement that transfers responsibility or liability for a piece of equipment to them.

The main forms of insurance business owners may need when it comes to the equipment they depend on are:

  • Loss or damage, which includes theft
  • Breakdown
  • Business interruption
  • Liability for any damage your equipment may cause to third parties

 

Talk to your Steadfast insurance broker to help make sure you understand your risks from leasing  and have the right cover for your business and assets.

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