Myth Busting Around Asset Purchases and Operating Leases
Quite a few misconceptions float around the question of whether to lease or buy an asset for your business. Myths arise from what we want to do, as opposed to what’s best for our business – shiny new Ute, anyone? – or from what works best for the salesperson you’re talking to.
This blog only looks at operating leases, that is, leases where you pay a set amount each month but you don’t end up owning the asset.
The mythology is also helped by the fact there is no hard or fast answer – sorry about that.
Myth : There’s less commitment with a lease.
You don’t have to find that large chunk of cash so it feels like your commitment is not as high when all you have to do is sign here.
Fact: There’s way more commitment with a lease.
Once you’ve signed that lease agreement, you really have no (easy) out for the term of the agreement. You have to keep paying for the 36 months, or whatever the term is, no matter what else happens in your business world. If you’ve bought an asset, all you have to do is sell it again.
Myth: It’s better for tax purposes to have a lease.
Because it’s fully deductible every month, right? This is what every salesperson will tell you. And it’s completely true.
Fact: But you can also claim your depreciation for tax purposes so it often works out pretty much the same.
There is rarely a significant tax difference between buying and leasing.
Myth: It’s cheaper to lease.
It feels cheaper because you don’t have to pay now or even provide a deposit.
Fact: It’s usually more expensive.
You pay for the convenience.
Myth: But if it breaks down, it’s not my problem
Maybe, maybe not, check the lease
Fact: It all depends on whether you have that in your lease agreement.
You get charged more to have that kind of cover and if it’s a new asset, would you need that added protection?
Myth: Owning an asset is the best option
Buying an asset outright is the best option – no finance, no strings attached
Fact: If you have the cash, it may well be.
However do you always want to wait for cash surpluses before expanding your business? Sometimes there is a business case for buying or leasing now to generate further revenue even if the finance options cost slightly more.
So how do you decide?
- How much extra revenue will the asset generate? Or how much will it save on costs? For example, buying yourself a shiny new Ute may well make economic sense if your old one is costing you a lot on maintenance.
- Whatever the asset is, do your homework. Compare all options from a second hand asset to a range of new options. What’s the cost? Is the seller offering any great deals on loans?
- Check out a range of options from the seller to your bank to find the cheapest interest rates you can find.
- Compare against buy vs lease costs. For example, you need a $10,000 asset and you can finance at the bank of 8% and at the end of 3 years, you estimate the value of the asset will be $3,000 or you can lease over 3 years at $300 per month.
- Buy = Interest of $1,281 + $7,000 = $8,281
- Lease = 300 x 36 = $10,800
- However, it may feel like the lease is better because the monthly repayments at the bank would be $313 per month as they include the principal amount.
- Consider also how much commitment you want to this asset. If you need to get rid of it before the term is up, then buying is definitely a good option.
Finally, why don’t you give us a quick call or flick an email through to email@example.com? We can usually help you sort this out.