Why You Should Consider Leasing
Entrepreneurs don’t need to buy business assets: it’s possible to rent or lease instead. There are pros and cons to both approaches, but it’s usually a good idea to at least consider leasing before parting with money for outright purchases.
Leasing and Hire Purchase
First of all, it’s worth clearing up any confusion about the difference between leasing and hire purchase. With leasing, a finance company buys a business asset for an entrepreneur who then makes regular payments that include interest. An entrepreneur doesn’t own the asset, but can upgrade it as necessary (although this will affect the leasing agreement and payments).Under a hire purchase agreement, an entrepreneur makes regular payments for the use of a business asset. With hire purchase, however, there’s a final payment after which the entrepreneur owns the asset.
The Types of Leasing
There are three types of leasing: finance leasing, operating leasing, and contract hire. Entrepreneurs should always check, and conduct market research, to establish the best option for their businesses and circumstances.A finance lease is a lease taken out over the anticipated life of the asset. Once the lease is finished, the finance company will no longer want the asset. An entrepreneur can therefore sell it, scrap it, or pay a small rent to continue using it. During the lease, an entrepreneur does not own the asset, but must keep it insured and maintained.
With an operating lease, the finance company recovers the asset at the end of the lease period. Consequently, the company has responsibility for the asset’s insurance and maintenance.
The third type of leasing, contract hire, is a popular way for an entrepreneur to acquire company vehicles. During the period of the contract, the leasing company has partial responsibility for vehicle servicing and repairs.
Advantages of Leasing
An entrepreneur may find one or more of the above leasing arrangements preferable to buying. Leasing is certainly a useful way of keeping capital available for other business needs. It’s also a good choice for assets an entrepreneur must regularly replace to keep up with market trends. Leasing companies are more than willing to accommodate a need for an upgraded asset by simply making changes to an existing agreement.Other advantages include:
- Leasing better equipment than it would be possible to afford if buying upfront.
- Putting the leasing costs against taxable income as a trading expense.
- Claiming a capital allowance on a five or seven year long-funding lease (a form of finance lease).
- Avoiding overdrafts and loans.
- Letting someone else handle maintenance (for operating leases and contract hire).
Disadvantages
The main disadvantages of leasing are as follows.- Entrepreneurs cannot claim capital allowances unless they have long-funding leases.
- It may be necessary to place a deposit down as part of a lease agreement.
- Some agreements may be difficult to change.
- An entrepreneur usually has to run a VAT registered business before obtaining a leased asset.
