BUSINESS ADVICE • 16 MARCH 2021 • 3 MIN READ

Myth busting: buy or lease business assets

a woman in pink shirt and a man in black suit discussing buying or leasing assets for their business in the office space

SECTIONS

Myth: There’s less commitment with a lease

Fact: There’s way more commitment with a lease

Myth: It’s better for tax purposes to have a lease

Fact: You can claim capital allowances on assets for tax purposes

Myth: It’s cheaper to lease

Fact: It’s usually more expensive

Myth: But if it breaks down, it’s not my problem

Fact: It all depends on whether you have that in your lease agreement

Myth: Owning an asset is the best option

Fact: If you have the cash, it may well be

So how do you decide?

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 van, 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. Breaking the lease early usually results in a lump sum payment to get out of it.

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: You can claim capital allowances on assets for tax purposes

Depending on the type of asset you buy there are various types of capital allowances available. For some assets this means you get a deduction for 100% of the cost of the asset in the year you purchase it, for other assets you will receive a lower % deduction each year.

For small business owners, the majority of plant and machinery assets will qualify for a 100% deduction in the year of purchase, thanks to the annual investment allowance (AIA). AIA isn’t available on assets such as cars and depending on the CO2 emissions of your car you may only be able to claim a 6% tax deduction each year.

The tax implications depend heavily on the type of asset that you purchase, with the main difference being the timing in which you can claim the tax deduction. Speak to an accountant who can help you decide what’s the best option for the asset you are purchasing.

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

When paying off an asset, you’re paying interest and principal and at the end of it, you own the asset.

With leasing, 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.

If it’s a new asset and/or under warranty, 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 leasing now to generate more revenue.

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 van 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.
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.

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