When they need an asset of some kind, many businesses will immediately think that purchasing is the only way forward. But this is not necessarily the best use of cash, particularly if you are borrowing it or going into overdraft to afford it. It pays to look at alternative ways of ‘acquiring’ assets like hiring or leasing. Whilst in the long run cash purchases actually work out cheaper they are not always the best use of capital, particularly for a small or growing business.
To lease or not to lease?
Leasing gives a company swift or immediate access to a valuable asset without the need to own it. In fact, it remains under the ownership of the finance company for the entire period. In effect the leasing company is ‘lending’ you the entire amount and you are paying back on a monthly basis. This is not only very good for managing monthly cashflow but you can reclaim any VAT and the leasing costs can also be deducted from the company’s taxable income!
Releases cash for growth!
When you lease or hire the cash that you otherwise would have spent on the asset is now available to finance other things, like growing the business. It also provides a business with a degree of flexibility that it wouldn’t otherwise have – you don’t own a depreciating asset and you can return it at the end of the period. Leasing will also very often allow a company the use of up to date equipment and also include some degree of maintenance and support within the package. After all, the finance company that actually owns the asset want to ensure its upkeep!
But are there any disadvantages to leasing?
Whilst leasing/hiring may be a very efficient way of managing cashflow in the short term by paying in monthly instalments, you do inevitably pay more for the use of the asset than you would by buying it outright. Also in the meantime, whilst you have use of the asset for the lease period, it is at no time considered to be a company owned asset and therefore cannot be used as security for any other purchases.
How is hire purchase different?
Whilst leasing means you never own the asset in question, hire purchase means that the company will own the asset when all the payments have been made to the finance company. The advantage of ‘buying’ in this way is the obvious benefit to cashflow and often the interest rate will be lower than it would had you bought the asset through a bank overdraft. And just like leasing you can claim capital allowances against your tax bill for the term of the contract.
On balance, it is not that important for a business to own all the assets it uses. A more efficient, more flexible way of acquiring or acquiring the use of an asset maybe through either leasing or hire purchasing as both have tax and cashflow benefits to any sized business.
Paddy is passionate about marketing and in particular helping new businesses to get their marketing mix right. He works very closely with a number of start up and early stage companies, helping them to define their product strategy and targets markets.