All the answers to your unique business lifestage questions
Owning assets increases the value of your business and provides security with which to obtain finance.
But few entrepreneurs have cash to buy everything up front, and high loan repayments can kill a company before it has submitted its first tax return. So which is better - to lease or to buy?
Should you lease or buy? Do you want to merely use the asset in the short term or own it in the long term? Before you sign on the dotted line, consider the pros and cons of buying vs leasing.
Leases and loans are simply two different methods of financing. One finances the use of an asset, the other finances the purchase of it. One isn't always better than the other and the decision depends on your particular financial situation and business priorities.
In strict Rand terms, leasing is almost never the cheapest option. However, there may be times when it makes the most sense. Buying is ideal if you plan to keep something for a long time, but items that become outdated every two to three years (like computer equipment and software) should rather be leased.
If you are starting your business on a tight budget, look at big-ticket items as potential leasing opportunities.
This could include any expensive equipment hat is needed to make your business run. Leasing allows you to avoid heavy upfront costs and obtain more equipment sooner.
Also consider depreciation values. If an item depreciates more quickly than SARS allows for in its calculations, then consider leasing.
Obviously the converse is also true - if an item depreciates slowly, then leasing (especially if there is no option to buy) remains unattractive.
- You own the asset. It can't be repossessed, unless it has been used as security for a loan.
- You are treated as the owner for tax purposes and can claim your own capital allowances.
- You don't tie your business into inflexible medium or long-term agreements that might be difficult to terminate.
- If interest rates fall, you may end up paying less than if you were in a fixed-term lease agreement.
- You have to pay the full cost of the asset up front out of cash or borrowed funds.
- Loans and overdrafts cost money. They can also be withdrawn at short notice and early repayment demanded.
- You can't easily spread the cost to coincide with money coming into the business.
- You are entirely responsible for maintenance.
- You can't deduct the cost of rental from your taxable income.
- You take all the risk.
- There is no large initial cash outlay or down payment.
- Being able to spread payments over a longer period eases cash flow.
- If equipment becomes obsolete you can upgrade it at the end of the lease.
- Lease payments are deductible as operating expenses if the arrangement is a true lease according to the South African Revenue Services.
- The leasing firm can provide expert technical advice.
- In the event of bankruptcy, the lessor has less claim on the assets of a firm than a general creditor does.
- Leasing usually costs more over the long-term. You also lose certain tax advantages that go with asset ownership.
- You lose the economic value of the asset at the end of the lease term, because you don't own it. Don't underestimate the salvage value of an asset at the end of the lease - it might be worth buying.
- A lease is a long-term legal obligation that you can't usually cancel. For example, if you were to end an operation that used leased equipment, you might still have to pay as much as if you had used the equipment for the full term of the lease.