Tradies Tax can review your current financial position, cash flow and cost base to decide whether buying or leasing is best for your trades business.
There are certain items of equipment, machinery and hardware that are essential to the operation of a trades business – whether it is the ute or truck you take on site, electrical supplies or specific high-end tools needed to get the job done.
However, when a critical yet costly business asset is required, should you buy this item outright, or lease it?
Here, we will weigh up the pros and cons of buying and leasing a business asset.
Buying
Pros:
It is a tangible asset – when you buy an item, you own the item outright and it will appear on your balance sheet as one your business assets. As such, by owning these assets outright you increase the perceived capital and value of your business. You can also claim the cost of the asset against your capital allowance for tax purposes.
It is yours for the life of the asset – once you own the item, you have full use of the equipment for the duration of the asset’s life. Your use of the asset is not reliant on keeping up regular lease payments, and if your financial circumstances change then you can sell the asset to free up the capital.
Cons:
It is an expensive outlay – paying for the item up-front is a large outlay for the business and will require you having the cash to cover this cost. Spending a large sum in this way may take cash away from other areas of the business, so you need to be 100% sure that this purchase is the right decision and a sound investment with no regrets.
You may require extra funding – if you do not have the liquid cash available to buy the item outright, you may need to take out a loan. Asset finance is available from funding providers but does tie you into a loan agreement that will add to your liabilities as a business, reducing your worth on the balance sheet.
Leasing
Pros:
Leasing has a cheaper entry point – if the item you need to purchase has a large price tag, leasing allows you to make use of the asset without the cost of buying it in full. For start-ups and smaller trade businesses with minimal capital behind them, this can make leasing a very attractive option. You may not own the asset, but you can make use of it, which could be the difference between business success or failure.
You can spread the cost – there is still an associated cost of leasing, but you can spread the cost over a longer period, making it easier to find the necessary liquid cash to meet your lease payments. With this money saved, you can then invest in other areas of the business, helping you to expand, grow and bring in more clients and revenue.
Cons:
You do not own the asset – there are different types of leasing agreements. Under a capital lease, you do own the asset (once you have paid if off), but if you opt for an operating lease, this is a more short-term lease, and you will not own the asset at the end of the contract. Ownership does have its advantages (including being able to sell the asset if required) so it is important to consider what kind of leasing agreement you are entering into and what the advantages/disadvantages may be.
You may pay more in the long run – most leasing agreements will attract additional costs and interest on your agreement, so you may end up paying more than the market price for your asset in the long run. If you can manage with the higher cost, this is fine, but bear in mind that buying outright may have offered greater value.
You may lose the use of the asset – if you cannot keep up your lease payments (e.g., poor cashflow) then the owner of the lease agreement may recall the asset. If this item is crucial to your business model, losing this key asset can have a profound impact on your ability to operate. In this respect, leasing is a riskier prospect, but also an easier option for businesses with less cash to splash.
How Can Tradies Tax Assist You in Making This Decision?
As a trades business owner, whether you opt to buy or lease your equipment is not always a straightforward decision to make, so we recommend consulting with your accountant early in the decision-making process.
Tradies Tax can help you review your current financial position, assess your available cash flow, and look at your regular cost base to decide whether buying or leasing an asset is the right choice for your business, so contact us today!
This blog was originally published by BOMA, but has had edits made by Tradies Tax for the benefit of our readers.