June 30 is creeping up fast. With it comes the inevitable question of whether it’s time to invest in new equipment or wait until the next tax year.
This question is even more urgent for small and medium businesses who are counting the final days of the $20,000 instant asset write-off, arguably one of the best tax breaks for small businesses in Australia.
But buying equipment isn’t the only option for manufacturers – you can also lease.
While the appeal of owning your equipment is often strong, leasing is more popular than you might think – according to GE Capital, up to 85% of small and medium businesses lease equipment.
So, should you lease or buy?
There are many factors to consider, and both have advantages and drawbacks depending on your business situation.
To help you make the best decision, here are some pros and cons of both:
Leasing equipment frees up capital and provides flexibility to upgrade to new technology, but it may cost more in the long run.
Advantages of leasing equipment
1. Keeps cash flowing
Leasing can free up significant capital for businesses, especially SMEs: you can acquire assets without spending a large portion of your budget upfront. Equipment leases rarely require a large deposit, which means you can start using the equipment without hampering your cash flow.
For growing companies or those just starting out, you’re then free to use capital in other areas, such as building your team. Perhaps you are looking to expand but can’t immediately afford to buy new coding, labelling and packaging equipment, which makes leasing an attractive option.
2. Tax benefits
Did you know you can deduct the full lease payment as a business expense on your annual tax return, reducing the net cost of your lease? When you purchase and finance an item of equipment, you can only deduct the interest portion as an expense – not the principal amount you are paying on the loan. As with all things tax related, we recommend talking to your tax professional for personalised advice.
3. Easier access to finance
Leases are usually easier to obtain than loans for buying equipment. This can be a significant advantage if your company credit isn’t great, or you need more flexibility around payment plans. Also, the monthly payments for leasing are often smaller than loan repayments, which helps with budgeting.
4. Upgrade equipment
Manufacturing technology is moving fast. With automation and the Internet of Things, it can seem like you have barely switched on the equipment before it becomes obsolete. If your equipment is likely to become outdated rapidly, leasing may be a wise move. Rather than being lumbered with equipment that’s obsolete, you can update your equipment and enjoy all the benefits it brings: greater efficiency, increased productivity, less risk, better ease of use, and more. Speak to your equipment provider for details – your contract may specify upgrades, or you can wait until the end of the lease term.
Disadvantages of leasing equipment
1. Overall costs may be higher
Leasing can sometimes end up more expensive than buying equipment outright, depending on the lease’s term. It’s also worth considering that you won’t build up any equity in the equipment, which means you cannot use it as collateral for a business loan.
2. No depreciation deduction
You might be able to claim leasing as a business expense, but you cannot claim a depreciation deduction on your tax return. When it comes to tax, you win some, you lose some.
3. Paying for obsolete equipment
Another potential downside to leasing is that you need to make continued payments for the lease term even if you stop using the equipment (and if your lease doesn’t include upgrades). Some equipment providers give you the option to cancel the lease if your business changes direction and the equipment is no longer required, but you need to factor in the early termination fees.
Ownership and tax benefits make buying equipment an attractive option, but the high initial investment and risk of obsolete technology is a barrier for some.
Advantages of buying equipment
1. It belongs to you
The most obvious advantage of buying equipment is that you gain ownership of it. This is a bigger benefit when the equipment has a long, useful life and is not likely to become technologically outdated soon.
2. Tax benefits
The Australian Tax Office provide another good reason to consider purchasing equipment outright: you may be able to receive tax savings through depreciation deductions. It’s worth bearing in mind that not all equipment purchases are eligible. Again, speak to your tax accountant for advice.
Disadvantages of buying equipment
1. Initial cash outlay
For some, purchasing equipment isn’t an option simply because the initial cash outlay is too high. Even with financing, most lenders require a down payment of around 20%. They may also place restrictions on your future financial operations to make sure you are able to repay your loan.
2. Risk of equipment becoming obsolete
If you purchase high-tech equipment, you run the risk that the equipment may become technologically obsolete, in which case you may be forced to reinvest in new equipment long before you had planned to.
Should you lease or buy?
Every situation is different. To work out the best option for you, consider these 5 questions:
- How long do you plan to keep the equipment?
- Is the equipment likely to become outdated quickly?
- Is new or used equipment the best fit for your needs (and budget)?
- What are your financing options for leasing vs buying?
- What are the tax benefits for leasing vs buying? (hint: talk to your accountant)
Upgrading your facility and investing in technology can make a difference to your bottom line. If you want to explore the option to lease or buy your equipment, talk to Matthews.
You may also find this blog on leasing product ID equipment as a great small business option to keep your technology current, and here are the 5 top reasons to upgrade your product ID and inspection equipment – before it breaks down.
Matthews’ large resource library has all sorts of information about business and technology and processes. And it’s all free to download.
Image credit: iStock / porcorex