People are often told to buy assets that will increase in value and lease equipment that will depreciate – that’s generally a good rule of thumb but what are the other factors a business should consider next time they need new equipment? Robert Spano, Chief Executive Officer at Alleasing takes a look.
When people find out what I do for a living, they often give me a quizzical look and follow it with two questions:
The answer to the first questions is ‘a wide and often surprising array of equipment from IT kit to medical and vet science equipment and even agricultural assets’. Essentially, we let the business decide what equipment they need, then we work with them to structure a lease that fits with their requirements.
The answer to the second question is somewhat similar in that there are a wide range of reasons why a business may lease. But, the fact of the matter is that leasing is not the right approach for everyone. And so, what follows hereafter outlines some of the factors a business should consider the next time they need equipment for their operation.
Do you have the cash to pay upfront?
By leasing your equipment, you can access the technology your business needs today without having to pay the full value of the asset upfront. While lease agreements vary, in most cases, there is no upfront payment.
Does your business value current technologies?
Technology continues to evolve at a rapid pace, which means many equipment types should be upgraded every few years to allow businesses to operate productively. If you purchase your equipment outright, you are then responsible for the disposal of that equipment as well as sourcing new equipment.
If you opt to lease the equipment however, you simply hand it back at the end of the lease term and focus on selecting the new equipment that’s right for your business.
IT kit is a good example. If you take out a three year lease on a fleet of laptops, you are free to move to newer, faster and cheaper laptops at the end of that period.
The other benefit to regular refreshes is that it helps from a competition standpoint – you may be able to keep up with, or even surpass the technologies used by other market participants, thus gaining a competitive advantage.
Does your business need flexibility?
If you want to trial a new piece of equipment without making a long-term commitment a lease could be the right approach. If it isn’t working for your business you can return it and find an alternative at the end of your lease term and you avoid the hassle of disposal or re-sale. Some leasing companies even provide an option to swap equipment part way through your term, thus allowing you to flex your equipment around your business needs.
You can also extend your lease period if you reach the end of the agreement and don’t yet want to upgrade or if you need to hang on to a piece of equipment while you complete a project.
Is predictable cash flow important?
A lease is structured into regular (commonly monthly or quarterly), set payments over and agreed term. This helps with budgeting and is commonly cited as one of the primary benefits of leasing.
A second benefit is that you can often bundle ‘extras’ into your lease arrangement, thus smoothing the costs for items such as installation, software and maintenance.
A third financial benefit is that you can use free cash for other items that will increase in value or are critical to growing your business.
On the flip side, leasing can cost more than if you had paid cash up front so it’s up to you to decide if the other benefits make that cost worthwhile.
Make the right choice for your business
I said at the outset that leasing isn’t right for every business. The most appropriate way to acquire equipment is dependent on a range of factors, including the equipment needed, its productive life, and a business’s financial and competitive situation.
Next time your business needs equipment consider these factors before you decide how you will fund the assets.
The latest Alleasing Equipment Demand Index (the Index) for New Zealand, So many assets, so much potential, issued in February 2017, shows businesses expect to substantially grow their asset base this year.Read full story
Amid an uncertain economic outlook and unexpected market conditions, the Alleasing Equipment Demand Index (the Index), Capital constraints: A common complaint, shows small businesses are the most bullish of the groups surveyed about demand for equipment finance this year.Read full story
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