Decide whether to lease or buy assets
To be able to operate successfully, your business might need to acquire assets or capital equipment, such as plant or machinery.
These assets may include office furniture, computer equipment, company vehicles, engineering machines or service equipment. See how to acquire assets for your business.
You could buy all of this equipment outright, or you might decide to rent or lease it instead. There are advantages and disadvantages with both options. This guide explains how the choice between buying and leasing can affect your business.
How to acquire assets for your business
There are two main ways you can pay for the resources and equipment your business needs:
- by buying it outright
- on hire purchase or lease
Buy an asset outright
Buying outright is a good option if you have the capital available, or if it is essential that you own the equipment. However, large capital expenditure can affect your cashflow.
Hire purchase or lease
Paying for goods on hire purchase or leasing equipment:
- allows you to use an asset over a fixed period in return for regular payments
- lets you choose the equipment you require, with the finance company buying it for your business to use
- usually makes your business responsible for the maintenance of the asset
The smaller payments will leave you with more cash, but because you pay interest on the instalments, you will pay more for the goods in the long run.
Leasing means you may never own the asset outright, although some lease arrangements let you buy the asset at the end of the agreement. However, you can often update your equipment without the expense of buying newer models.
With hire purchase, the business owns the asset once all the payments have been made. One advantage of hire purchase is that the interest rate is likely to be less than the bank loan or overdraft that may be needed to buy the item outright. You can also claim capital allowances against tax from the beginning of the hire purchase contract.
Types of leasing
There are different kinds of lease arrangements. It makes sense to consider them all to see which is best suited to your business, your particular circumstances and the asset that you are acquiring.
The three main types of leasing are finance leasing, operating leasing and contract hire.
1. Finance leasing
- A long-term lease over the expected life of the equipment, usually three years or more, after which you pay a nominal rent or can sell or scrap the equipment - the leasing company will not want it any more.
- The leasing company recovers the full cost of the equipment, plus charges, over the period of the lease.
- Although you don't own the equipment, you are responsible for maintaining and insuring it.
- You must show the leased asset on your balance sheet as a capital item, or an item that has been bought by the company.
- Leases of over seven years, and in some cases over five years, are known as 'long funding leases' under which you can claim capital allowances as if you had bought the asset outright.
2. Operating leasing
If you are considering operating leasing, remember the following points:
- it is useful if you don't need the equipment for its entire working life
- the leasing company will take the asset back at the end of the lease
- the leasing company is responsible for maintenance and insurance
- you don't have to show the asset on your balance sheet
3. Contract hire
Contract hire is often used for company cars and:
- the leasing company takes some responsibility for management and maintenance, such as repairs and servicing
- you don't have to show the asset on your balance sheet
Advantages and disadvantages of renting business equipment
Asset finance allows businesses to acquire the equipment and assets they need in order to operate that they may otherwise be unable to afford. It can also free up working capital for use in other areas of your business and save you from having to take out a large loan to buy equipment outright.
There are two main forms of asset finance:
- Leasing - renting it over a period in return for fixed rental payments.
- Hire purchase arrangements - an initial deposit is paid towards the cost of the asset and the balance is then paid in instalments over a period of time. At the end of the hire purchase period, you would make a final payment and gain ownership of the asset.
You should think about leasing or renting equipment that has high maintenance costs, can quickly become outdated, or is only used occasionally.
Advantages of leasing or renting equipment
There are several advantages of leasing or renting equipment:
- you don't have to pay the full cost of the asset up front, so you don't use up your cash or have to borrow money
- you have access to a higher standard of equipment, which might be too expensive for you to buy outright
- you pay for the asset over the fixed period of time that you use it, which helps you budget for the future
- as interest rates on monthly rental costs are usually fixed, it is easier to forecast cashflow
- you can spread the cost over a longer period of time and match payments to your income
- the business can usually deduct the full cost of lease rentals from taxable income
- if you have not bought the asset outright, you won't have to worry about any overdraft or other loan taken out to finance the purchase being withdrawn at short notice, forcing early repayment
- if you use an operating lease or contract hire, you may not have to worry about maintenance
- the leasing company carries the risks if the equipment breaks down
- the leasing company can usually get better deals on price than a small business could and will have superior product knowledge
- on 'long funding leases' - finance leases over seven years and sometimes over five years; and some long operating leases - you can claim capital allowances on the cost of the assets
- if you need to upgrade or replace the equipment, you can simply make a small adjustment to your regular payment rather than invest a lump sum upfront
Disadvantages of leasing or renting equipment
However, there are also some disadvantages of leasing or renting equipment:
- you can't claim capital allowances on the leased assets if the lease period is for less than five years (and in some cases less than seven years)
- you may have to put down a deposit or make some payments in advance
- it can work out to be more expensive than if you buy the assets outright
- your business can be locked into inflexible medium or long-term agreements, which may be difficult to terminate
- leasing agreements can be more complex to manage than buying outright and may add to your administration
- your company normally has to be VAT-registered to take out a leasing agreement
- when you lease an asset, you don't own it, although you may be allowed to buy it at the end of the agreement
You may also be eligible for tax reliefs when buying or leasing assets. For more information, see acquire assets and borrow money tax efficiently.
Advantages and disadvantages of buying business equipment
Buying equipment outright may at first seem like the best option, but it's always a good idea to think about whether this makes best use of your working capital. It may be more cost-effective to rent or lease certain items.
Advantages of buying equipment
There are several advantages of buying equipment outright. It means you:
- fully own the asset - unless you have used it as security for a loan
- are treated as the owner for tax purposes and can claim capital allowances
- don't tie your business into long-term agreements which may be difficult to end
- will pay less overall than you would through a lease or hire purchase agreement
Disadvantages of buying equipment
However, there are also several potential disadvantages of buying equipment outright:
- you have to pay the full cost of the asset up front which can affect your cashflow
- you may need to use an overdraft or loan to fund the purchase - overdrafts can be withdrawn at short notice and in some cases early repayment of loans can be demanded
- small businesses might not get the same price as bigger businesses
- if you do not have good product knowledge and experience you could make an unwise choice and you may end up buying equipment you don't need
- you can't easily spread the cost to coincide with money coming into the business
- you are entirely responsible for the maintenance and repair of the asset, which can be a risk if the equipment breaks down or needs replacing
- you won't be able to take advantage of the tax benefits of deducting the cost of rental from your taxable income
- the value of the asset may depreciate over time and be worth less than you paid for it
As with leasing arrangements, there also are tax reliefs for buying assets outright. For more information, see acquire assets and borrow money tax efficiently.
Understanding depreciation of assets
The value of your tangible or physical assets - such as vehicles, machinery and equipment - will fall as they are used and eventually wear out. This is depreciation and is used in your business accounts to write off the value of the assets you have bought over time.
Depreciation means the cost of the asset is spread, so it is written off against the profits of several years rather than just the year of purchase. Depreciation is not allowable for tax. Instead you may be able to claim the cost of some assets against taxable income as capital allowances.
To work out depreciation you need to know:
- the date you started using the asset
- the asset's estimated useful life
- the asset's initial cost
- any possible value it may have at the end of its use - eg to be reused or reconditioned, or as scrap
- any costs that may be related to disposal
Business Accounting Basics provide advice on how to calculate depreciation.
For intangible assets ie assets that don't have a physical presence, such as your brand or know-how, you should seek professional advice. See business assets.
Choosing a leasing company
The types of companies that offer hire purchase and leasing contracts include:
- subsidiaries of major UK banks
- providers owned by manufacturers, such as car manufacturers
- non-UK banks
- independent finance houses
- equipment suppliers
- members of the Finance & Leasing Association (FLA)
When assessing the most appropriate leasing company to use, make sure:
- the provider is a reputable company, preferably a member of the FLA
- your contract corresponds with any verbal or written quotations
- the period for which you need the asset is covered by the length of the leasing agreement
- you are aware of any financial penalties that may be incurred if you wish to end the agreement early
- the equipment you are leasing is new
- you have read the contract carefully before signing it - checking the total cost, the period of hire and notice periods
- you understand all the contract terms and conditions, and charges