Every company needs assets to operate, from machinery and hardware to vehicles and furnishings. Without these, staff cannot do their jobs and customers are left unserved.
However, securing these assets comes at a substantial cost. Buying assets outright requires significant capital that some businesses simply do not have. Leasing offers an alternative option, breaking the cost of equipment into regular instalments.
There are specific pros and cons to leasing versus buying assets. If you are acquiring them for your business, you may wonder which is the best route forward. Our guide explains the ins and outs of each so that you make the right decision.
What is leasing?
Leasing is when you effectively rent an asset from a lender. You gain use of the object and agree to regular payments over a set timeframe. At the end of the agreement, the lender will take the asset back. At this point, you have the option to pay a minimal amount to buy the equipment or take out a new contract (perhaps on another piece of equipment).
Leasing often goes alongside hire purchase, which works similarly, except there is an understanding from the beginning of the contract that you own it from day one. As such, payments will be slightly higher.
Both options differ from buying an asset where you would have to cover the entire cost upfront.
Leasing pros and cons
The pros
- Less pressure on cash flow
The main advantage of leasing over buying is that it makes the cost of equipment more affordable. There is less pressure on cash flow as you don’t need to fork out for a large payment.
Instead, you need to ensure you can afford the regular repayments under your contract.
- Additional perks
Some leasing contracts come with additional support, such as maintenance and repairs. If your agreement includes this, it will save you time, money and effort having to obtain the same services and will allow you to keep them in better working condition.
- Flexibility
You’re only tied in for the period you sign up for when leasing an asset, typically 3-5 years. Once your contract ends, you’re free to pursue other options, including upgraded systems or new products.
It’s also possible to negotiate a contract length that suits your needs if you only require the items for a specific period (such as for a temporary project).
- Option to own
Buying isn’t the only ownership option. In a leasing arrangement, you still have the choice of owning it at the end (provided you clear the owed balance), whereas with hire purchase you own it from day one.
If you’re undecided about whether you want to own the item, it’s a great option to retain use while you make up your mind.
The cons
- Increased expense
Although leasing is often seen as more affordable, you ultimately will pay more. This is because interest will be included in your repayments.
If you choose to own the item at the end of the contract, you will have to pay an additional amount. This again raises the total cost than if you just bought the asset outright in the first place.
- Additional fees
There are often additional fees, such as document fees, to a leasing contract. If the item is damaged in your use, for example, there will be a charge.
Some contracts might also charge for additional services, such as maintenance.
It’s also worth noting that you will need to pay a deposit upfront, so you must find the capital for this (although it will be significantly less than buying the item entirely).
- The asset may be seized
With leasing, you will never have total control of the asset. It won’t affect your balance sheet or contribute to your business value.
It also means that if you default on payments, there is the risk that the lender will seize the item and sell it to cover their costs. It leaves you without the assets you need to operate, harming your productivity.
Buying pros and cons
The pros
- Total control
When you buy an asset, you have complete control. You are free to do whatever you want with it.
This includes selling the asset if you no longer need it or are seeking a cash flow boost.
- Added business value
As you own the asset, it will be added to your balance sheet and contribute to your business value.
You will also be able to utilise the asset as security to raise finance, such as loans.
- Long-term use
Buying an asset offers long-term use. As there is no contract to stick to, there is no ‘end date’.
If you know you will use the item for years (especially if it’s integral to your operations), it is an ideal solution.
- Cost-effectiveness
Buying tends to be more cost-effective than leasing as there is no interest factored in or additional charges. Overall, you will pay less.
It’s also worth noting that buying requires one payment. There is no need to pay instalments, which requires you to have enough cash flow monthly.
The cons
- Upfront cost
The most significant challenge associated with buying equipment is paying the total cost upfront. Depending on what you buy, this could be substantial – especially if you’re buying multiple items.
You will need cash reserves or a loan, which might not be accessible for every company. However, second-hand value of the assets could lower the price.
- Long-term commitment
Buying requires a long-term commitment. You can’t suddenly change your mind about the asset.
If you do decide you want to upgrade your asset or no longer need it, your only option is to part-exchange or sell it. This may take time to arrange, and you will invariably receive a lower cost than you originally paid.
Which is right for your business?
It boils down to your preference and cash flow position, whether leasing or buying is most suitable for your company.
Buying is the best option if you have the funds. Leasing may fit your needs if you want flexibility or do not want to cover the full cost.
A UKBA advisor will also take you through the advantages and disadvantages of buying and leasing and help you create a strategy that meets your requirements.