THEREIN LIES THE QUESTION WATSON

Are certain pieces of equipment or machinery essential to your business operations?  Do you need to update these on a regular basis to remain in business and competitive?  If the answer to either or both of these questions is a resounding ‘yes’,   you should be asking yourself a third question … should you purchase the item outright or should you lease it? There are positives and negatives to both options as noted below.

BUYING – POSITIVES

1. When a company buys equipment/machinery it becomes the owner of that item.  The tangible item will subsequently be shown on the company’s balance sheet as an asset.  Thus, owning a piece of equipment or machinery can increase the perceived capital and value of the company.
2. The acquisition cost of the asset is usually claimable (eg: depreciation) as a deduction against income earned by the company for tax purposes.   With the Government’s newly introduced investment boost initiative we discussed in the last edition of Our Roar, this could make the purchase a more attractive proposition than what it might otherwise be.
3. When a company owns an asset, it is the company’s outright.  The continual usage of the item is not dependent upon the company’s financial ability to meet monthly lease payments.
4. Ownership of the item confers carte blanche on the company to do what it wishes with it.  This includes selling the item in the future to free up capital should it so wish.

BUYING – NEGATIVES

1. Usually purchasing equipment/machinery is an expensive exercise for a company.  Accordingly, paying for the asset up front, in one lump sum, can deplete capital reserves.
2. Depleting capital reserves can have consequential effects, possibly negatively affecting other areas of the business such as operations.
3. If the company does not have the cash resource to pay for the equipment/machinery, it will need to borrow funds.  This loan will subsequently appear on the company’s balance sheet as a liability, thereby possibly contravening bank ratios.  At the very least, the liability is likely to reduce the company’s value in the eyes of other parties such as purchasers.
4. Where a company has borrowed funds to acquire the item, it will likely need to make regular monthly loan repayments.  Doing so can have a negative effect on cash flows.

LEASING - PLUSSES

1. When a company leases equipment/machinery it makes monthly lease payments.  Consequently, not paying an upfront sum to acquire the item saves the company from spending its cash.  This means the company will have cash to direct into other areas of its business.  For some companies, such as those who are in their early years of trading, holding onto funds and satisfying monthly lease liabilities may thus enable continual trading.
2. Even if a company does not need to enter into a leasing arrangement for cash flow reasons, avoiding lump sum acquisition costs will mean the company has the cash to channel into other company activities such as expansion and growth.  Spreading the cost of leasing over a longer period of time may therefore be a better business proposition for the company.

LEASING – MINUSES

1. Possession is nine tenths of the law meaning ownership of an item confers control.  Hence, if a company owns an item it has an ability to do what it wishes with it.  Whilst there are a myriad of different leases, often ownership is not a feature of them.  Thus, when a company lease an item as opposed to purchasing it, it deprives itself of the ability to sell the item and receive liquid funds should cash be needed.
2. Higher costs are usually incurred with items are leased.  In the long run, a company may end up paying more than the market price for the equipment/machinery leased.  Accordingly, if a company wants to ensure it gains the highest value, leasing may not be a sensible option for it to entertain.
3. Leasing a piece of equipment/machinery integral to a business may be a risky proposition the company should not entertain. If for instance the company cannot meet its lease payments, it is likely the lessor will repossess the leased item.  This could have a huge impact on the business, possibly threatening continual operations. Hence, a company making the decision to lease an item may be a risky decision to make than purchasing the item.

SUMMARY

A quantum of cost-benefits and risk-opportunities are at stake when a company is making the decision to buy or lease the equipment/machinery it needs.  Having sound advice from a trusted Lion is helpful in the assessment process so be sure to contact Greenlion before you make your decision.