For owner managed businesses, acquiring essential plant and machinery is often a critical decision. Whether to lease or buy can significantly impact:
Cash flow
Tax liabilities
Operational flexibility.
This decision becomes even more pivotal in today’s UK economic climate, characterised by fluctuating interest rates, inflationary pressures, and rising costs.
So what’s the best course of action for your business - buy or lease? Obviously the answer depends on your specific circumstances, but we’ve compiled some basic considerations to help you weigh up both options.
The advantages of leasing
Flexibility
Leasing tends to give you more flexibility, at a higher cost. It spreads out the cost of an expensive item – you don’t need to save or borrow the purchase price, and instead you make regular payments. You can return a leased item if it’s not working out, or upgrade to a better model as your business grows.
If the equipment or plant is something that quickly becomes obsolete, or that you’re likely to upgrade, or that you’re not totally certain is right for your business, leasing could be ideal.
Preserve liquidity
While leasing is generally more expensive across the lifetime of the item, it also preserves liquidity and frees up your money to invest in other areas of the business. With the cost of borrowing at higher rates and in a climate of rising operational costs, this is especially valuable.
Access to new technology
Leasing arrangements often include options for upgrading to the latest equipment at the end of the lease term. This ensures businesses remain competitive without the burden of selling outdated machinery.
Tax benefits
Lease payments are typically tax-deductible as operating expenses, reducing taxable income. This can be advantageous compared to claiming depreciation on purchased assets.
Reduced maintenance responsibilities
Many leasing agreements include maintenance and repair services, alleviating additional financial and operational burdens.
Predictable costs
Fixed monthly payments make it easier to budget, particularly in a volatile economic environment.
Why leasing may not be the answer
Higher long term costs
Over time, leasing can be more expensive than purchasing outright, especially if the machinery is needed long-term.
Lack of ownership
At the end of the lease term, the business doesn’t own the equipment, potentially requiring new lease agreements or purchases.
Limited of customisation
Leased equipment may come with restrictions on modifications or use, which can hinder specific operational needs.
The advantages of buying
Long term cost savings
You may be paying upfront and making a bigger commitment financially but this option can provide long term cost savings particularly when equipment lasts for a significant length of time and maintains its value.
Buying gives you certainty and ownership
If your business has sufficient cash reserves to avoid reliance on high interest financing, owning an item of plant or equipment gives you unrestricted use for the lifetime of the item.
Once purchased, it becomes a business asset, potentially adding value to the company - particularly if the equipment has a high resale value or is unlikely to become obsolete - and increasing borrowing capacity. You also have that added flexibility allowing you to customise and have full control over how the machinery is used, maintained, or upgraded.
You can also sell it if you need to free up some cash.
Tax depreciation
Since the full cost is paid up front, you have no ongoing payments, and there may be opportunities for tax depreciation. Under UK capital allowances, small businesses can claim tax relief on machinery costs, including the Annual Investment Allowance (AIA), which allows up to £1 million in qualifying expenditure.
Why buying may be the wrong course of action
High initial expense
The upfront cost can put a strain of your business’ cash flow, making it challenging for you to invest in other areas as you navigate economic uncertainty.
Depreciation
Machinery loses value over time, and businesses must absorb this cost. Take into account that selling used equipment may not recoup a significant portion of the initial investment.
Maintenance and repairs
Have you taken into account the cost of maintenance - remember that owners bear full responsibility for upkeep so you may be adding to operational costs and complexity.
Obsolescence risk
As we all are acutely aware, technology evolves at a rapid pace so owning outdated machinery could be putting your business at a competitive disadvantage.
Conclusion
The decision to lease or buy plant and machinery depends on the specific needs and financial health of your business. Leasing provides flexibility and preserves capital, which is crucial in uncertain economic times. Buying, however, can be a wise investment for stable businesses with long term needs.
Running through the numbers, we can help you make the right decision. The decision to invest in new plant or equipment can be tricky one so get us to tally up the upfront and ongoing costs, and weigh these against the economic benefits you might get from the new equipment. We will consider your cashflow, the cost of borrowing, and sales projections, so you can make an informed choice for your business growth and sustainability.
Want to know more?
Running through the numbers, we can help you make the right decision. The decision to invest in new plant or equipment can be tricky one so get us to tally up the upfront and ongoing costs, and weigh these against the economic benefits you might get from the new equipment. We will consider your cashflow, the cost of borrowing, and sales projections, so you can make an informed choice for your business growth and sustainability. Please contact us.
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