There are a lot of things that one has to consider when setting up a business. One of the most important things is acquiring equipment and assets required to carry out business activities smoothly. In the initial days of running a business, it is hard to decide whether to lease or purchase this equipment.
If you are on your way to purchase expensive electronics, heavy machinery, tote boxes or other accessories for your business, the first thing you should ask yourself is whether you should lease or purchase what you need.
If you have the money, going ahead with the purchase will be the best option, but there are chances that you may run into a cash flow problem in the distant future.
Your other option will be to lease the equipment you need or get a purchase loan for the same – divide the money over a period of duration and pay more than the total amount you were supposed to pay. Each system has its definite advantages. It all depends upon the situations and the finance you have.
Types of leases
To begin with, there are two types of leases.
- True lease – This lease is also known as an operating lease. This lease enables you to rent the accessory for a certain period of time.
- Capital lease – With this lease, you can acquire the accessory by giving additional money at the end of the lease term.
Both of these leases are treated differently for tax purposes. With a true lease, you are not the owner of the accessory which enables you to deduct the leasing fee every month as regular business expenses. You don’t have to conduct depreciation and deduction on the same. But with a capital lease, you will have to pay additional tax as you are going to own the asset in the future.
You must have understood by now that, leasing any accessory is expensive compared to buying it. But even though there are a lot of cost differences, there are many reasons one should give it a thought.
If you are buying accessories that run the risk of being non-functional before the end of its shelf life, the true lease can prove handy in such situations provided the lease term is not longer than its shelf life. So, if you are getting a lot of computer systems for your business, give a thought to the lease as electronics like computers run the risk of becoming outdated fast.
If you are signing a lease agreement, it means that at the end of the agreement period you return the accessories and then get a lease or purchase newer accessories.
You don’t have to care about additional costs of ageing assets that are either non-functional or need repairs. But if you need those assets, you may have to replace them and handover other items like documents, store data, software etc.
A true lease also gives you a lot of financial benefits. Compared to a purchase loan, the true lease requires no down payment or a small amount depending upon the terms and conditions. Also, the true lease payments can be shown as business expenses on your tax return which provides you with additional finance benefits.
With the above two mentioned benefits, leasing does seem like an attractive option. But, you should be careful about the lease term. If your company or business is advancing fast, you may need the latest and best assets for which you will have to pay a hefty amount to break the lease.
So, if you are going to use the equipment for five years or less and there are chances that these are going to become obsolete, you should go ahead with the lease.
If you are purchasing assets with a loan, you have to give a down payment which might seem costlier than leasing at the time. But it will help you financially in the long run as the cost of the asset might be lower when leased.
Though buying equipment is cheaper and offers the advantages of captured equity and flexibility, there are some risks associated with the purchase. If the accessory becomes obsolete, or the assets or the land you purchased depreciates in value, you may end paying more loan amount than the asset’s actual worth.
Leasing or purchasing business accessories has both its advantages and disadvantages. By keeping the cash flow in mind, discuss these details with your accountant and go ahead with the option that suits you the best.