Leasing vs. Owning: Why Equipment Leasing May Be the Smarter Choice for Your Business
As a business owner, you know that having the right equipment is crucial to your success. But when it comes to obtaining that equipment, should you lease or buy?
It's a question that many business owners may struggle with, and the answer depends on your specific needs and circumstances.
In this article we'll take a closer look at the pros and cons of leasing versus owning equipment to help you decide whether leasing or purchasing is the better option for your business.
Understanding Equipment Leasing and Ownership
Before we cover the benefits of leasing versus owning equipment, it's important to understand the difference between the two.
Owning equipment means that you purchase it outright and take full ownership of it from day one. You will either be required to pay the purchase amount in full or take out a Hire Purchase Agreement and pay instalments, usually on a monthly basis.
Leasing equipment means that you rent it for a set period of time, typically a few years, and then return it to the leasing company at the end of the lease term. You are most likely to need to pay a set amount upfront and then carry on making monthly payments until the end of the lease. This is known as a payment profile and usually operates on a 0, 3, 6 or 9 months of payments, which needs to be paid in advance.
Leasing equipment can be a great option for businesses that need to conserve their cash flow and don't want to tie up a lot of capital in equipment purchases. This can be especially true for businesses that need to regularly update their equipment to stay competitive. Leasing allows them to do so without having to sell old equipment and purchase new equipment outright.
On the other hand, owning equipment can be a better option for businesses that need to use the equipment for a long period of time or don’t want to be limited by any lease terms and conditions.
If your business is looking to make a purchase without spending large amounts upfront, then asset finance can be a good option as it allows you to reduce your initial outlay and spread the cost of your purchase.
Benefits of Equipment Leasing
Now that we've covered the basics of equipment leasing and ownership, let's take a look at some of the advantages of leasing equipment for your business.
Lower Upfront Costs
One of the biggest advantages of leasing equipment is that it requires lower upfront costs than purchasing equipment outright. When you lease equipment, you typically only have to pay a small down payment, which depends on the payment profile you opt for.
Another advantage of leasing equipment is that it can you more flexibility than owning equipment. When you lease equipment, you can choose the lease term that works best for you.
This means that you can easily upgrade to newer equipment when your lease term is up, without having to worry about selling your old equipment or taking a loss on it due to depreciation.
Leasing equipment can also offer tax benefits for your business. When you lease equipment, you can typically deduct the lease payments as a business expense from your tax return. This can help reduce your taxable income and lower your tax bill. Please note that you should check with your accountant on the specific tax advantages because these can change from year to year.
Advantages of Owning Equipment
While leasing equipment can offer many benefits for your business, owning equipment also has its advantages. Let's take a closer look at some of the benefits of owning equipment.
Long-Term Cost Savings
One of the biggest advantages of owning equipment is that it can provide long-term cost savings for your business. When you purchase equipment, you own it and don't have to pay any additional lease payments. This means that over time owning equipment can be more cost-effective than leasing it.
Owning equipment also gives you greater control over how you use it. When you own equipment, you can use it as often as you need to without worrying about exceeding any lease terms or restrictions. This can be especially important for businesses that need to use their equipment frequently or have unique equipment needs.
Owning equipment can also provide asset value for your business. When you own equipment, it becomes an asset that you can sell or trade in when you no longer need it. This can provide additional value for your business and help you recoup some of your initial investment.
You could also be eligible for asset refinancing if you ever want to raise funds secured on the value of the asset.
Factors to Consider When Deciding Between Leasing and Owning
When deciding whether to lease or own equipment, there are several factors that you should consider. These include:
Your budget is one of the most important factors to consider when deciding between leasing and owning equipment. Leasing equipment can be a good option if you need to conserve your cash flow, while owning equipment may be more cost-effective in the long run if you have the capital to invest upfront.
Your equipment needs are also an important consideration. If you need to constantly update your equipment to stay competitive, leasing may be a better option. If you need to use your equipment for a long period of time, owning may be more cost-effective.
Tax implications are also an important consideration when deciding between leasing and owning equipment. Leasing equipment can offer tax benefits, but owning equipment can provide depreciation benefits that can help reduce your tax bill.
Tax Implications of Leasing vs. Owning
As we mentioned earlier, there are tax implications to consider when deciding between leasing and owning equipment. Let's take a closer look at the tax benefits of each option.
Tax Benefits of Leasing
When you lease equipment, you can typically deduct the lease payments as a business expense on your tax return. This can help reduce your taxable income and lower your tax bill. Additionally, because lease payments are considered an operating expense, they are not subject to depreciation, which can also help reduce your tax bill.
Tax Benefits of Owning
When you own equipment, you can take advantage of depreciation benefits. Depreciation allows you to deduct the cost of the equipment over its useful life, which can help reduce your taxable income and lower your tax bill. Additionally, if you sell the equipment for more than its depreciated value, you may be able to take advantage of a capital gain, which can also provide tax benefits.
RLA Capital would advise to check with your accountant on the specific tax implications when purchasing or leasing equipment.
How to Lease Equipment for Your Business
If you've decided that leasing equipment is the best option for your business, the next step is to learn how to lease equipment. Here are the steps you'll need to follow:
- Determine your equipment needs and budget.
- Research leasing companies and compare lease terms and rates.
- Choose the leasing company that offers the best terms for your business.
- Complete the lease application and provide any necessary documentation.
- Wait for the leasing company to approve your application and set up your lease agreement.
- Sign the lease agreement and begin making lease payments.
Conclusion: Making the Smart Choice for Your Business
As you can see, there are many factors to consider when deciding between leasing and owning equipment. While leasing can offer lower upfront costs and greater flexibility, owning can provide long-term cost savings and asset value.
Ultimately, the choice between leasing and owning will depend on your specific needs and circumstances.
If you're still unsure about which option is best for your business, it's a good idea to consult with a financial advisor or leasing expert. They can help you weigh the pros and cons of each option and make an informed decision that will benefit your business and cash flow.
Whilst RLA Capital cannot offer financial advice, we can provide various business loans to assist with cash flow. RLA Capital would recommend speaking with your accountant if you are experiencing cash flow problems.