One in two Australian businesses are indicating that old, unproductive assets are holding them back, but with capital preservation a key concern in the current economic climate, which finance option should businesses use to acquire new equipment?
Robert Spano, Chief Executive Officer of Alleasing, outlines the issues businesses should consider before making a decision.
We are now years on from the height of the GFC but its impacts are still being felt. We continue to read reports about business investment being below trend and we see the impact of that in our own research, with half of all Australian businesses indicating they are being detrimentally impacted by unproductive assets. We also see the impact across many developed economies, with lower productivity growth a common issue.
Positively, a number of Australian firms have indicated they will increase their asset base during the December quarter 2014 – if these intentions are acted upon, we could see a quantifiable difference in the productivity of Australian businesses.
Our research reveals that a mix of new and replacement assets are earmarked for acquisition, but regardless of the equipment needed, one of the primary decisions to be made is ‘should we lease or should we buy’. Both leasing and borrowing will enable a business to preserve cash, or use it for projects with the potential to provide a return. However, there are a range of other differences that need to be considered before deciding which option is right for your business.
1. Is there a monthly budget you need to adhere to?
Loans and leases can be structured for different periods of time, which allows monthly payments to be adjusted, however it is often the case that a lease will provide a lower monthly cost because leasing organisations may invest a residual in the asset.
2. What is the expected life of the equipment?
As a general rule, any equipment with a life of three years or less is a good candidate for a lease. If the expected use of the equipment is longer than three years both options could be appropriate.
3. Does the equipment have a specific purpose?
If your business works on a project basis and needs to acquire equipment for a specific piece of work, an operating lease or rental may be more appropriate than a loan. These options allow you to return the equipment at the end of the agreed period, whereas a loan means you will be left with the equipment, as well as the hassles of selling or scrapping the asset.
4. Do you need flexibility or are you just looking for a way to pay off the purchase?
Achieving flexibility can be more difficult with a loan because you are subject to a lender’s rules. A lease on the other hand, provides significant flexibility to work in with changing business needs. You can for example, extend the term, upgrade equipment mid-term or add to your assets during the lease period.
5. Do you want to conserve your bank lines of credit?
By leasing your equipment through an independent lease provider, you can preserve your bank working capital for other projects.
6. Is equipment obsolescence a concern?
If the technology you need changes rapidly, it’s likely you will want to avoid owning the equipment and instead opt for a finance solution that enables regular upgrades. An operating lease or rental solution can be structured to ensure your business keeps up to date with technology, whereas a loan results in ownership of the asset.
7. Do you want to finance soft costs and avoid an upfront payment?
A leasing solution allows you to finance 100 per cent of the cost of the equipment, as well as soft costs such as delivery, installation, set-up, testing and training. In addition, a loan will often require a down payment whereas a lease will not.
Recent Alleasing research reveals that many businesses are moving away from outright purchase or borrowing to acquire new equipment, with a mere third of SMEs intending to take the ownership route and half planning to lease or rent. The drivers behind these decisions are diverse and include a lack of access to secured financing, capital management efficiencies, bundling by vendors and the desire to keep assets off the balance sheet.
Every business has different needs, whether they relate to usage, cash flow or other financial objectives. It’s for this reason you should consider your options and understand the benefits and drawbacks of each before making a decision on your next asset acquisition.
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