Should I pay cash for capital equipment?
Equipment leasing might improve your cash flow..
Instead of purchasing computers, plant or other business equipment, many businesses use commercial leasing because it improves their cash flow. Here we look at some business equipment finance options including:
- Commercial leasing
- Operating leases
- Finance leases
- Fully maintained leases
- Hire purchase
- Chattel mortgage finance
Commercial leasing – monthly tax-deductible payments
With commercial leasing, instead of you paying for your business equipment, the lender does. They then lease the business equipment to you for a monthly tax-deductible rental payment.
Operating lease vs finance lease – what’s the difference?
With a commercial equipment lease, you have two options: an operating lease or a finance lease. At the end of a finance lease, the lender gives you the opportunity to purchase the goods for a previously agreed residual lump sum payment. In contrast, at the end of an operating lease, there is no liability to you for the residual payment. It is the responsibility of the lender to whom you return the equipment.
Operating lease vs finance lease – which is right for me?
Choosing between an operating lease and a finance lease depends on your situation. An operating lease is effectively a rental arrangement with no liability to you at the end of the term, whereas a finance lease has a residual amount that is your responsibility whether you retain goods or return them to the lender. There is also an accounting difference, with operating leases being off balance sheet, while finance leases are recorded on the business balance sheet. To understand which equipment Leasing option best suits your business, talk to an MFAA member.
Fully maintained equipment leases
With a normal equipment lease, you are financing the equipment over a term and the maintenance of the equipment is your responsibility. With a fully maintained lease, the lender can build the cost of maintenance into the rental payments.
Commercial leasing – structure your payments to suit
The advantage of commercial leasing is that instead of paying the whole purchase price in cash up front, you’re making ongoing monthly payments. This is much better for your cash flow. What’s more, you can structure those lease payments to suit your expected revenue streams – pay more in high season, less when business is quieter.
Commercial leasing – up to date with technology
Some commercial leases allow you to upgrade to new equipment – say the latest computer. You pay for this flexibility with a higher interest rate and lease payment, but if it’s critical to your business to use the latest technology, it could be a good option.
Equipment leasing and hire purchase: what’s the difference?
Hire purchase is another way to finance capital equipment that doesn’t require you to pay the full purchase price up front. Commercial hire purchase is like a commercial lease in that you pay “rent” over the repayment term. The difference is that with hire purchase, you gain equity as you make payments and title passes to you with the last repayment. A hire purchase agreement can be structured with or without a “balloon” payment ie an additional lump sum payment to be made at the end of the lease.
Hire purchase – a different tax structure
One of the big differences between commercial leasing and hire purchase is in the handling of tax deductions. With hire purchase, instead of claiming the whole monthly payment as a tax deduction as you do with a lease, you claim the depreciation of the equipment and any interest charged. This tends to mean you will deduct more in the early years compared to a commercial lease.
Chattel mortgage equipment finance
Chattel mortgage finance is a loan that allows a business using the “cash” method of accounting for the Goods & Services Tax to claim back the GST on the equipment’s purchase price in their next Business Activity Statement.
To talk about your business finance options, contact [email protected] who can help you select the loan that is most appropriate to your needs.