When you require a new asset for your business, it is a good idea to consider whether you should lease or buy prior to the purchase. The asset could be motor vehicles, machinery, IT equipment or other items required for your business. There are cash flow, accounting and tax differences to the options.
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A finance lease means that the lessee has the risks and rewards of ownership, with an operating lease the lessor retains the risks and rewards. For example, if the asset depreciates in value the lessee with a finance lease suffers, however, the operating lessee does not.
Cash Flow Considerations
If your business isn’t cash rich, either a finance lease or an operating lease may be an attractive option. I recommend comparing all available options when making the decision. Utilising a return on investment calculation, net present value and/or comparing costs of finance are all useful to the decision making process.
Cash flow Comparison Tips
- If you are cash rich, buying outright may be the right decision, compare your savings rate to cost of finance whether from borrowing money via a bank or through a finance lease company. However, also consider whether your business is going to require the cash for operating costs or possible business investments.
- Compare the financing costs for the different lease options versus how much it would cost for you to borrow from the bank. Interest rates can vary greatly, so it is always best to shop around before committing.
- Compare the taxation impact comparisons to cash flow. I will go into more detail regarding taxation differences shortly.