Small business owners usually lack the money on hand to buy business assets outright without tightening their cash flow. On the other hand, ownership can also be appealing.
So, what’s the right option for you: lease or buy?
There may be times when you can’t get a hold of cash to purchase business assets straight away, or you are saving your cash on hand for other more important uses. When it comes to purchasing and financing business assets, several options are available to you.
This is suitable if you wish to own a business asset, such as key plant or equipment, outright. In most cases, you can claim a tax deduction on the interest payable on the loan.
If you eventually wish to own the asset, but don’t want to use your available cash, then a hire purchase (HP) agreement may be more suitable. This agreement involves the bank or financier buying the asset and hires it to your business for a prescribed period of time.
With finance leases, the bank initially owns the equipment and leases it to you for an agreed period of time. The rental payment can be arranged with a residual value balance, which allows you to buy the asset when the agreement ends. This options lets you better manage the initial cash flow.
Perhaps, you can opt to lease equipment for a prescribed time period, which brings its own benefits such as being more flexible and being more certain with regards to your cash flow.
Is buying your premises the right decision?
Possibly one of the most important decisions confronting small businesses is whether to lease or purchase business premises. Having ownership of commercial real estate can be attractive; the premises could turn into a major asset for your business, delivering possible capital growth while you avoid paying rent to a third party. There’s also the feeling of security with owning your premises.
By buying your premises, you can also borrow against the asset and use it to expand your business. In some cases, there could also be benefits in buying business spaces using your superannuation fund.
Cons of ownership
The significant amount of money you need is one of the disadvantages of purchasing business premises. You may also be required to provide a personal guarantee by the lender or mortgage company.
There is also minimised flexibility with ownership in case you need to move your business, downsize or upsize. If the nature of your business or its operations is specialised, you may have difficulty in selling a niche asset fast.
Lastly, the infusion of money into a property purchase can possibly cost you precious opportunities; it may minimise the possibility for investment in other productive assets of your business. Small business owners should ask themselves what is more important: concentrating on their primary business competencies or on real estate ownership.
For businesses that are just starting out, the flexibility brought by a short-term lease could be more beneficial until your business is on better footing.
Tax and ownership structure implications
Before making financial decisions, make sure to get familiar with all the various tax and ownership structure implications. It is recommended that you consider seeking advice from a licensed taxation accountant or financial planner.
Other business asset classes
There are various purchase or financing strategies to choose from for different business asset classes. For instance, a novated lease agreement is suitable in cases where the staff of a business utilise cars. This type of agreement, signed between the employer, employee and financier, deliver flexibility to employees while cutting down administration costs.
In the age of information technology, leasing assets for shorter prescribed periods may be more appropriate for small businesses, as it lowers the risk of obsolescence because certain IT equipment becomes outdated fast.
Cash flow requirements
The type of business you run will offer opportunities to maximise your cash flow and ultimately decide which way you will go: rent or buy your business assets.
How and when would your business assets earn money for you? When considering the answer, keep this simple rule in mind: it is illogical to fund an asset for a period longer than the length of time it is useful.
What is the situation with your cash flow? Is your business earning a steady cash flow, or does your business experience seasonal variations? The smart thing to do is prepare comprehensive projections to compare scenarios and allow you to prepare appropriately.
The major financial decisions you have to make for your business are determining how and when to buy assets. So, seek the help of your accountant, financial planner, and in certain cases, your small business banker.
Expect to make many major decisions when running your own small business, including whether to buy or lease equipment. Before deciding, seek the advice of your accountant or a financial expert. PJS Accountants, chartered accountants, offer a full range of services including accounting, taxation, business improvement, superannuation, business valuations, asset protection, succession planning, estate planning and bookkeeping. Contact PJS Accountants for enquiries.