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leasing equipment?
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lease vs buy…
leasing rapidly depreciating equipment can have significant financial benefits to your business… More
lease vs. buy
what are your future business needs?
The current state of your business and your future plans can have a considerable influence on financing equipment. The following decision tree helps you consider all the options.
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lease vs. buy analysis
When compared to buying equipment outright, leasing helps preserve cash for projects and expenditure that offer better business returns or represent a more efficient use of capital and resources.
When it comes to expenditure, businesses should invest as little as possible in depreciating assets and as much as possible in appreciating assets. Leasing provides a compelling option to keep the cost of depreciating assets down and pass obsolescence risk to a third party.
Leasing can build the future expected resale value of assets into the pricing to keep rental payments low. The future resale value risk is assumed by the lessor not the lessee. What's more the costs of disposing of the asset at the end of the lease including environmentally friendly recycling of assets (including potentially hazardous components) is also assumed by the lessor.
Some business owners do not realise that many items can actually be leased instead of bought. equigroup understands IT and Healthcare assets and can work with you to include software and services into your rental agreement.
| Rental |
Cash | |
|---|---|---|
| Who owns equipment? | Finance provider. | Business. |
| Cash flow | Low rental payments can be budgeted for during the assets useful life. | Large upfront payment. |
| Term | Usually matched to expected use and or refresh cycle of the assets. | Not defined. |
| Flexibility | Fully. Upgrades, extensions, add−ons all possible. | Discretionary expenditure can require additional budget and sign off. |
| Risk of obsolescence | None. Risk lies with Lessor who assumes the future value of the assets and builds this into the lease pricing. | Owner assumes this risk. |
| Accounting and tax | Can often be treated as off balance sheet (refer to individual tax advisors for specific advice). Rentals are simply charged to a company’s profit and loss and are fully tax deductible | Assets appear on balance sheet and any associated loan appears in liabilities. |
| End of term options |
|
With no defined usage period, assets can often be used well beyond their economic life meaning the overall age profile of a fleet of assets can be older. This leads to lower productivity and higher maintenance costs. Owner responsible for disposal including environmental obligations. |
A common financial methodology for deciding if taking an asset on rental is more economic than buying is to compare and select the lowest net present value of the after tax cash flows of each alternative.
NOTE: To complete this analysis, accurate and relevant results can only be obtained using client specific information. Among other things, the following would generally be required:
- The prospective lessee's marginal tax rate. In the case where the lessee is not a taxpayer, e.g. a local authority or a tax-exempt body, pre-tax cash flows are identical to after-tax cash flows, as tax is ignored.
- The lessee's own cost of raising fixed-rate incremental funds. For private companies this rate could be the cost of borrowing fixed-rate funds, while for listed companies the rate could be the weighted average cost of capital (WACC), a blended cost of fixed-rate bank borrowing and capital applicable to the lessee.
To find out how equigroup can help your business, contact us today.