Is it better to Lease or Purchase your Machinery and Equipment?

Sooner or later the time comes in every business when it needs to replace that aging item of equipment or machinery – Trucks, Vans, Computer Systems, Printing Presses, Forklift Trucks, Audio Visual Equipment, Generators, Furniture  - nothing lasts forever.  And most companies will need to use some form of third party finance so will inevitably look at the two options – to lease or to purchase.

But what exactly do we mean when we say to Lease or Purchase and why do different solutions suit some businesses but not others?

Purchase Options

When we talk about buying assets on finance we are generally referring to either a Hire Purchase or a Lease Purchase agreement.  Don’t be confused by the term Lease Purchase, it is simply a Hire Purchase with a different name.  The key clause of this type of agreement is that the title of the goods will pass to you on completion.  They are Purchase agreements and as such you will own the goods outright when all the payments have been made.

Leasing Options

Leasing, on the other hand, is quite different.  There are two main types of lease, a Finance Lease and an Operating Lease.  Finance Leases are structured so that the Lessee (that’s you) has responsibility for selling the goods at the end of the lease whereas under the terms of an operating lease the goods are simply handed back at the end of the agreement.  In both cases the assets are purchased and owned by the Lessor (the finance company) and you pay a rental to use them.

Contract Hire is a form of operating lease normally associated with company vehicles – cars, vans, trucks and fork lift trucks and is a separate subject in its own right not dealt with in this article.

Which is the Best Option for Your Business?

So when faced with making a decision as to which is best for your business, why choose one over the other?  Well, as you no doubt suspected, there are a number of factors to take into account.

Cash-flow

In business “Cash is King”, without it you have no business and the most common cause of failure is when the cash runs out.  So when cash is short, finding an asset finance option that requires the smallest down-payment is likely to be the most important factor that drives your decision.

From this perspective, leasing is a real winner.  The main reason is one of VAT.  When goods are leased, the VAT is paid by the lessor (that’s the finance company).  You then pay VAT on the rentals as and when they fall due.  On large items this can make a significant difference to the size of up-front payment required.

Corporation Tax

If the availability of cash is less of an issue, you will probably be looking for the most tax efficient option and this will depend upon the type of goods and the availability of tax allowances in your businesses.

In many cases, businesses that have not utilised their Annual Investment Allowance (AAI) will be able to write off the total cost of any new assets or equipment in the year that they are purchased (company cars are specifically excluded).  Under these circumstances a Hire Purchase agreement is likely to be the best option.

However, if the AAI has been used up, it would be worth looking at leasing, especially for IT equipment and other items that depreciate rapidly.  Lease rentals can be charged as a tax allowable expense apportioned over the useful life of the asset in question, so in some cases, a two or three year Lease might be more tax efficient than a Hire Purchase agreement.

Usage

Give some consideration as to what the items will be used for and how they will be treated.  All operating leases will have clauses relating to the condition of the goods on return so take care not to be exposed.  For example, if you run a fleet of builders vans which are on and off site then you might be better off avoiding an operating lease and opting for a Hire Purchase or Finance Lease agreement.

Put the Finance in Place First

Before going out to shop for any new assets or equipment, make sure you get the finance in place first.  It will mean that you can negotiate the best deal, confident in the knowledge that the right type of finance is ready and waiting to go.

Find a Reliable Equipment Supplier

For all businesses price is important but not if the goods don’t turn up, the installation is a sham or there is no one to help if the thing goes wrong after 6 months.  So find a good supplier, preferably a company that has been recommended to you and has a reputation for doing a reliable job and offering good value.

Good Advice

Get some good professional advice.  It’s worth discussing any planed acquisitions with your accountant or business advisor and talking to an Asset Finance specialist such as TeleLease.

You can find out more about asset and equipment finance by calling TeleLease today on 01908 516300 or by visiting www.TeleLease.com