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:
- 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
- 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
- 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
- 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- You may end up stuck with outdated equipment that’s worthless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 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
- Business interruption
- Liability for any damage your equipment may cause to third parties
Talk to your insurance broker to help make sure you understand your risks from leasing and have the right cover for your business and assets.
Important notice - Steadfast Group Limited ABN 98 073 659 677 and Steadfast Network Brokers
This article provides information rather than financial product or other advice. The content of this article, including any information contained in it, has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the information, taking these matters into account, before you act on any information. In particular, you should review the product disclosure statement for any product that the information relates to it before acquiring the product.
Information is current as at the date the article is written as specified within it but is subject to change. Steadfast Group Ltd and Steadfast Network Brokers make no representation as to the accuracy or completeness of the information. Various third parties have contributed to the production of this content. All information is subject to copyright and may not be reproduced without the prior written consent of Steadfast Group Limited.