Leasing vs Buying Business Equipment in Australia
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As a small business owner, you’ll likely need equipment, whether it’s tools, vehicles, or office technology. But should you lease or buy? Both options have pros and cons, and the right choice depends on your business’s needs and finances. Let’s break it down.
Pros and Cons of Buying Equipment
Pros of Buying
Full ownership: Once you pay for the equipment, it’s yours. You don’t have to worry about ongoing lease payments or returning the equipment at the end of a contract. This may be especially beneficial for assets that have a long lifespan and won’t need frequent upgrades. Ownership also means you aren’t locked into any leasing agreements, which can sometimes come with limitations or unexpected fees.
Long-term savings: Over time, buying is usually cheaper than leasing. However, it’s important to weigh up the opportunity cost of the upfront capital outlay involved in the purchase of your equipment. Could that capital be better spent elsewhere? Or maybe you need to use asset finance to purchase your equipment, which essentially adds to the cost through the loan used. While outright purchasing eliminates ongoing lease expenses, financing the purchase with a loan means considering interest costs and repayment terms.
Tax benefits: You can claim depreciation and other deductions like loan interest on purchased assets. This helps to reduce your overall tax liability. The Australian Taxation Office (ATO) provides deductions for business asset depreciation, and under certain schemes, small businesses may be eligible for immediate write-offs. However, tax benefits vary depending on the asset’s value, how long you keep it, and how it’s used within your business.
No restrictions: You can modify, upgrade, or sell the equipment whenever you want. Unlike leasing, where contracts may limit how you use the asset, buying allows for complete flexibility. If you need to upgrade, for example, you’re free to sell and reinvest the money into an upgrade.
Cons of Buying
Higher upfront costs: Buying equipment requires a large initial investment, which may strain cash flow and eat into your working capital. Getting a loan for equipment might make sense, reducing the initial outlay, however, a loan will come with interest.
Depreciation: Equipment loses value over time, especially vehicles and technology. When it comes time to upgrade or sell, it may be worth much less than what you paid. While depreciation offers tax benefits, it still may be a financial downside to owning assets.
Maintenance costs: As the owner, you’re responsible for repairs and servicing. These costs can add up, particularly for heavily used machinery or vehicles. Unlike leasing, where maintenance is sometimes included, buying means planning for ongoing upkeep expenses.
Leasing Equipment: Pros and Cons
Pros of Leasing
Lower upfront costs: Leasing doesn’t require a large lump sum, making it easier to manage cash flow. Instead of a big one-time expense, you pay smaller, predictable amounts over time. This frees up capital for other areas of your business, such as research and development or expansion. For businesses that don’t have excess cash on hand, leasing can be a more accessible option.
Up-to-date equipment: Technology and machinery evolve quickly, and leasing allows you to upgrade at the end of your lease term. This is especially useful for industries where equipment becomes obsolete fast, such as IT, medical, and manufacturing sectors. Instead of being stuck with outdated tools, you can switch to newer, more efficient models as needed.
Tax deductions: Lease payments are typically considered operating expenses, meaning they are tax-deductible. This can help lower your taxable income like how depreciation on assets can.
Maintenance often included: Many leasing agreements include maintenance and servicing, reducing the risk of unexpected repair costs. This is particularly beneficial for expensive machinery or vehicles, where breakdowns can be costly. With maintenance covered, you can avoid large, unpredictable expenses and keep your equipment running smoothly with minimal hassle.
Cons of Leasing
Ongoing payments: Since you don’t own the equipment outright, you must continue making lease repayments for as long as you use it. Even after years of leasing, you may still have nothing to show for your investment unless your lease includes a buyout option. This can be a disadvantage compared to purchasing, where payments eventually stop once the asset is paid off.
Potentially higher long-term costs: Leasing can end up costing more than buying over the long run, especially if you lease the same equipment for many years. While the lower upfront cost is appealing, adding up all the payments over time may exceed what you would have spent purchasing the equipment outright (or even with finance). Before committing to a lease period, compare the total cost over its full term to ensure it’s financially beneficial.
Usage restrictions: Leasing agreements often come with restrictions, such as limits on how the equipment can be used or penalties for excessive wear and tear. For example, vehicle leases may have mileage limits, and equipment leases might require adherence to specific usage guidelines. These restrictions can limit flexibility and add extra costs if your business needs change.
Considerations to Help You Decide
When deciding whether to purchase or lease equipment, ask yourself the following questions.
How frequently does my industry require upgrades?
If your business operates in a fast-evolving industry, such as technology, manufacturing, or medical fields, leasing can help you stay competitive by providing access to the latest equipment without the burden of ownership. However, if the equipment has a long lifespan and won’t become obsolete quickly, purchasing may be a more cost-effective investment.
How will this impact my cash flow and balance sheet?
Leasing spreads costs over time, preserving working capital and improving liquidity, which can be beneficial for businesses with tight cash flow. On the other hand, purchasing is a long-term investment that increases assets on your balance sheet but may reduce short-term cash reserves. Whether leasing or financing a purchase, consider how loan repayments and lease payments will affect your cash flow and overall financial position.
What are my financing options for purchasing?
If buying equipment, you may need to use a loan to fund the purchase. There are many different types and structures of finance and each option has different tax implications, interest costs, and repayment structures that can impact profitability and cash flow. Assess whether financing aligns with your business’s financial strategy and whether the total cost of ownership (including interest and depreciation) justifies the investment.
We’re Here to Help
There’s no one-size-fits-all answer when it comes to leasing or buying business equipment. The right choice depends on your cash flow, tax position, and long-term business goals. If you need guidance on financing options, tax implications, or how to structure your equipment purchases, get in touch with our team. We’re here to help you make the best financial decision for your business.
