Financial Data
Updated 26 Feb 2020

The right questions to ask before buying or leasing an asset

The buying of new assets is always stressful for business owners who have a watchful eye on their cash flows and the profitability of their enterprises. But, there is always the alternative to lease the asset instead of committing to a purchase. 

02 December 2015  Share  0 comments  Print

All the answers to your unique business lifestage questions

“Making the right decision about whether or not to buy or lease assets that may range from vehicles to computers can be made easier if the right questions are asked and the correct options are selected,” says Nicholas Nkosi, Head of Vehicle and Asset Finance – Retail at Standard Bank.

Is the asset essential to your business?

“The first question to ask in these tough economic times is whether the asset is essential, or if it is part of a wish list. To make sure it is bought for the right reasons, it pays to sit down with a blank piece of paper and write down what the asset is in one column.  In a second column, list the reasons why it has to be bought right now. 

Related: Green leasing made easy

In a third column, list the short-term and long-term benefits of making the purchase vs those of leasing. This way, you will make sure that the asset is vital to the business, you have an indication of how it will perform and you will know the financial returns if you lease or if you buy in order to make an informed decision.” 

Then, says Nkosi, ask yourself:

Must it be new or can a used asset do the job?

The price differential between these two options could be the deciding factor. Liquidation sales and even auctions can be great sources of equipment-especially if you operate within the food industry.

Does cutting down on the price mean sacrificing quality?

Whether you are buying a van for the business or an industrial mixer, there is always someone who can supply a cheap brand that does the job.

If you decide to buy the asset then you should enquire about its lifespan, if it is sold with a guarantee and if spare parts are readily available. Buying cheap could turn out to be the expensive option.

If you decide to lease the asset then you should ask about its maintenance and service history, you do not want to end up with an asset that causes you more problems than solutions.

Shop around for the best price and deal

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This can save you a lot of money and headaches along the way.

Does the asset come with a guarantee and service contract?

Sometimes it is wise to pay a little more for warranties and on-site repairs of faulty equipment within a defined period. This offer usually comes standard with a lease agreement.

Will the new equipment help streamline the business and increase productivity?

If additional machine capacity doesn’t pay for itself and increase your sales, you should probably think twice about buying it.

Is training part of the deal?

Often, people need to be trained to operate new equipment. Check to see if this is part of the deal or whether you must source training at the company’s expense and then work that expense into the budget.

“Once all operational issues have been satisfactorily answered and the decision is made to buy the asset concerned, the focus should then turn to finance. Making the right decision about finance can help ensure that your cash flow is not negatively impacted on by your purchase,” says Nkosi.

Things to consider here are: 

Paying cash for the asset and then amortising the cost over the period allowed for this by SARS. For many small businesses, cash flow can be constrained. If this is the case in your business, you can also think about:

1. Buying the asset on instalment sale

You can select the number of payments you wish to make and know that for the period of the sale, your costs will remain constant-that is unless interest rates rise, impacting on the repayments. 

Selecting a fixed rate of interest where your repayment is fixed for the period of the loan is an option to overcome the risk of rising interest rates which increase your repayment.

2. Leasing

This enables you to use the equipment over a defined period and then return it to the owner (the leasing company) at the end of the agreed period. Often, you can buy the equipment from the supplier once the contract has ended.

The advantages of leasing, even though it is usually more expensive than other options, are that the owner will usually include servicing and maintenance in the lease cost. 

In the event of equipment breaking down during the lease period, it is then the responsibility of the owner to install new equipment.

Leasing means that as technology changes, you can also easily update equipment. In many cases, larger leasing companies often enable lessors to upgrade equipment during the period of a lease.

3. Financing through an overdraft

If your business has a good credit record, the bank may allow you to purchase equipment using a pre-agreed overdraft. This enables you to buy assets quickly.

Related: Buying or leasing? Keep your options open

4. A loan

A normal business loan also has its advantages. A bank loan can be repaid over a set period. If you have a good credit record, it could be a revolving facility that is constantly available.

As the loan is paid off, you can make use of the credit balance to make further purchases-something very convenient for businesses operating in rapidly changing environments. 

“Any decision to buy or lease an asset must be carefully thought through, especially in these tough economic times. Business owners should therefore never hesitate about consulting an expert - an accountant will always be able to advise on what your implications are when it comes to tax; and a business banker will be able to help select or tailor a payment option that suits you and your business,” Nkosi advises.

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