If you are thinking about leasing business equipment, it is important to understand the options available.
To help you make an informed decision I’ve prepared the following checklist of important issues to consider.
Leasing Business Equipment - The Business Case
A key motivation for leasing business equipment is often its potential to generate income or improve efficiencies.
However, before outlaying any capital or seeking finance, it is important to “do your numbers” to ensure it stacks up financially.
Like any investment, you need to ensure the returns or gains you will make will outweigh the costs.
Business Equipment - Buy or Lease?
The next question is to decide whether you would be better off buying or leasing the business equipment.
On one hand, if you buy the equipment, you will own it outright and thus not have an additional financial commitment to meet.
On the other, leasing business equipment preserves precious capital which may be better used for other, more important, purposes such as to:
- Fund growth
- Take advantage of opportunities
- Deal with unforeseen events
Many businesses choose the financing option because a monthly repayment provides greater flexibility and is less risky than a large capital outlay.
A key part of what I do as an Equipment Finance Specialist is help my clients align repayments to their cash flow.
One size doesn’t fit all – it is so important your repayments are correctly structured at the outset, to avoid problems down the track.
Equipment Obsolescence
Innovation and technology updates can mean what was “state of the art” at the time of purchase, is obsolete within a relatively short timeframe.
If the equipment you use depreciates quickly or requires updates the cost of staying current can be huge.
In these circumstances purchasing it outright could be an expensive mistake.
A better option may be to rent the equipment from a Financier using an Operating Lease.
Choose the Right Product
When leasing, a business choosing the right product is critical.
Whilst there is a number available, the two most common are a Chattel Mortgage, or an Operating Lease.
The main way a Chattel Mortgage differs from a Operating Lease is ownership of the asset.
With a Chattel Mortgage
- You own the equipment
- The lender takes a charge of the equipment as security
- The borrowing is repaid over an agreed period
- Can include a balloon to reduce monthly payments
- When the loan is fully repaid, the Lender discharges their security
- Businesses registered for GST can claim the GST Input Tax Credit in the purchase price on their next Business Activity Statement
With an Operating Lease:
You “lease” or “hire” the asset from the Financier for fixed monthly repayments over a set period
At the end of the term, you have the option of:
- Handing the asset back to the financier with no more to pay
- Purchasing it for a pre-determined price
- Upgrading to the latest equipment with a new Finance Lease
An Operating Lease is ideal for equipment that depreciates quickly, or which uses technology that changes rapidly.
Taxation
To the extent the equipment is used for business purposes:
- With a Chattel Mortgage, you can claim depreciation and interest as a business expense. Currently accelerated write off is also available with the governments Instant Asset Write off Scheme
- With an Operating Lease, you can generally claim the rental as a tax deduction
Avoiding "All Your Eggs in One Basket"
Many business owners use Equipment Finance to build a relationship with alternate Lenders (including major Banks) external to their core business and personal financing.
This is possible because the finance is secured by the asset being financed.
It can help avoid eroding core borrowing capacity and importantly, cross collateralisation of other business or personal assets to the borrowing. It still involves documentation etc, but once set up, can provide faster access to the equipment you need.
Summary
As I have outlined above there are several factors that need to be considered when Leasing business equipment.
The key to a successful outcome is planning and where needed asking questions.
If you have a need or would like to learn more don’t hesitate to give me a call.
