What are the pros and cons of equipment leasing?

March 10, 2016

Any business decision is a process of balancing the pros with the cons. Whether this is in government departments or the board room, decision makers need to assess all the information before deciding on a course of action.

This is particularly true when it comes to financial matters. For government agencies, corporations, mid-sized firms and small businesses alike, managing to keep an asset base that is up-to-date and running well is a constant process, and one that can cost significantly more – in terms of both time and money – should the wrong decision be made.

A wealth of options

A recent survey from White Clarke Group [1] found that equipment finance and leasing makes up 40 per cent of all equipment expenditure for Australian businesses today, making it an increasingly popular method that many organisations are opting for to acquire new assets and equipment. The remainder of companies borrow funds to purchase equipment from banks or use existing capital to buy their new assets outright.

The January 2016 Alleasing Equipment Demand Index (the Index) provides a more in-depth look at the percentage split of equipment finance options for asset acquisitions among Australian organisations:

  • Operating lease (25.4 per cent)
  • Buy outright (19.3 per cent)
  • Finance lease (13.8 per cent)
  • Borrow from banks to purchase outright (5.8 per cent)
  • Hire purchase (5.2 per cent)
  • Rent (4.6 per cent)
  • Other (7.9 per cent).

With a wide range of options for funding new equipment acquisitions available, understanding the characteristics of each is an important step in making a strong financial decision.

Here are some of the pros and cons of equipment leasing:

Pros

Predictable payments – Depending on the equipment a government agency or business needs, purchasing outright using cash is a considerable expense that can make a large dent in the capital expenditure budget. Utilising an operating lease, by contrast, involves acquiring equipment immediately, but spacing out the payments for it in instalments over an agreed period. It’s easier on cash flow and frees up capital that can be spent elsewhere, because instalments become and operating expense and are therefore paid from the operational expenditure budget.

Accounting treatment – Given the equipment instalments are an operating expense only, thus the equipment becomes off-balance sheet. With the lease term usually structured between two to seven years, the cost of the equipment can be claimed as a tax deduction.

Removal of maintenance headaches – Equipment and machinery doesn’t last forever so it will likely need maintenance, an addition or repair to keep it in peak condition, and eventually can require upgrading or replacing. The Index shows that 64.6 per cent of surveyed organisations say assets that are overdue for replacement are impacting their operations in a significant way, which includes lower productivity, less flexibility or slow growth. In an operating lease or rental agreement situation, servicing, upgrade and even disposal costs can be incorporated, putting less burden on the lessor.

Avoid obsolescence – When equipment that is purchased outright or through a bank loan reaches the end of its lifecycle, the owner is responsible for disposing of the redundant assets and acquiring replacement assets. At the end of an operating lease or rental agreement, there is no residual to be paid, and the lessor can choose to return the equipment, upgrade it should it become obsolete, or even extend the agreement.

Cons

Overall cost – While payments on leased equipment are spread out over the lease term and absorbed as an operating expense, the overall amount a government agency or business might pay for use of the asset can be slightly higher than its purchase price as a result.

Can be more complicated – Many of the benefits of leasing equipment involve saving time and money, though a lease agreement can be more complicated than an outright purchase in some instances. However, if government agencies and businesses ensure they work closely with their finance provider, any initial hurdles to get over will pay dividends in the future when it comes to seeking help managing their assets or upgrading.

 


[1] http://www.whiteclarkegroup.com/knowledge-centre/view/australia-asset-and-auto-finance-country-survey-2015

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