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  • #973318
    Skythelimit
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    Is it generally preferable to lease capital equipment – rather than buy it – when starting a business, if that equipment may be upgraded in 2-3 years time?

    Also, are rent, try buy schemes a better option than leasing or do they have their own issues?

    Thanks.

    #1060920
    Steve_Minshall
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    Skythelimit, post: 75342 wrote:
    Is it generally preferable to lease capital equipment – rather than buy it – when starting a business, if that equipment may be upgraded in 2-3 years time?

    Also, are rent, try buy schemes a better option than leasing or do they have their own issues?

    Thanks.

    Hi,

    I don’t think there is a straight answer. I would look at any capital purchase on a case by case bases. It will not take long to work out all the costs associated with each funding method and choose accordingly.

    As a personal preference I like the idea of spreading the expense of an item over its useful life. I like to think that capital equipment is paying its way rather than hogging the businesses cash flow up front. Then it is a straight calculation between leasing and borrowing and weighing up the merits of each.

    #1060921
    AgentMail
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    DISCLAIMER – I am not an accountant or financial planner, but use to sell equipment on leases.

    Firstly, it can be hard to get anything on lease as a new business, without paying through the roof on interest, or signing a directors guarantee which essentially eliminates any liability safety nets.

    Secondly, I prefer to keep my ongoing costs to a minimum, and only buy things when I can afford them – this is not always practical for every business, I appreciate.

    There is the financial argument that by leasing you get to claim the interest as an expense, whilst depreciating the asset, but an expense is still an expense.

    Best bet, if it is an important piece of equipment would be to talk to an accountant. The other thing to consider is that by buying something, you may find that it’s usable life is actually 3-4yrs or 5-6, and you are not locked in to upgrading at the end of lease to avoid baloon payments. One company who purchased a machine I used to sell managed to squeeze 10yrs out of something that should have lasted 5.

    #1060922
    Kennethti
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    Do your research – make sure you read the fine print and you understand what kind of arrangements you are getting yourself into.

    I have had a client which had rented telecommunications equipment with an option to purchase for a nominal amount at the end of the period.

    The contract also included an automatic renewal clause – after the end of the period the client failed to advise if it was purchasing the equipment or not, and as a result ended up continuing to pay the rental for the next year – for out of date telecommunications equipment!

    #1060923
    James Millar
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    A little depends on the nature and value of the equipment but generally I would suggest proper bank asset finance (not a typical point of sale lease). Cash flow in most growing businesses is very important and if you can finance some assets at a decent interest rate then it’s worthwhile.

    Cash should be kept for other expenditures where finance is not available (marketing). Dont get caught up in the 20% + leases provided by many retail stores (by third parties). Run a calc on your cost capital and if your debt is cheaper than equity its a no brainer – take the debt. On the other hand if equity (your cash) is cheaper and more really available than debt then go for that.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1060924
    GailH
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    You can also look into which things you can get as “virtual” services. This is typically cheaper than leasing with shorter (or no) term contracts, no balloon payments and no red tape.

    I work in the telecoms industry, and know for sure that you can go virtual with things like your fax machine and PBX. I expect virtual services are available for other industries too.

    I also learned an interesting thing when I worked for a big multi-national (who sold PCs and printers). When we had equipment we no longer needed, it was less hassle for us to just throw it away than it was to resell it or donate it to charity. We would often tell people (like the local schools) “off the record” that if they dropped by our bins that night, they might find something worth rescuing. Old PCs, printers, scanners, etc. were left beside the bins to make for easy pickings.

    If you’ve got any big companies near you, it might be worth contacting them to see what they do with equipment they no longer need. You never know what you might score! :)

    Gail

    #1060925
    VehicleMods
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    Skythelimit, post: 75342 wrote:
    Is it generally preferable to lease capital equipment – rather than buy it – when starting a business, if that equipment may be upgraded in 2-3 years time?

    Also, are rent, try buy schemes a better option than leasing or do they have their own issues?

    Thanks.

    Try and pay cash if you can without affecting your liquidity. Don’t ever use Flexirent rent, try buy etc on small items. If you run a financial calculator over the figures, you are paying ursurous rates! Buy them and take the depreciation deduction.

    #1060926
    danny63
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    Usually lease is better option but in some cases which let’s say you have a good amount of start money or some categories of business buy is better long term

    #1060927
    VehicleMods
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    danny63, post: 75755 wrote:
    Usually lease is better option but in some cases which let’s say you have a good amount of start money or some categories of business buy is better long term

    After years of working in the finance industry and running sophisticated software actuarial tools over the lease/buy decision, I can tell you that as a form of finance, leasing is generally never the cheapest option. The exceptions are:
    1. If the item has very high depreciation rates.
    2. You have a lot of carry forward losses so tax deductions so additional tax deductions are of no financial benefit.

    In the case of option 2, it is better to give the depreciation tax deduction to the lender by leasing who passes it back to you in the form of a lower interest rate. This of course assumes that you are dealing with a reputable lender that only seeks to get his target after tax financial return regardless of the finance rate and does not rip his customer’s off by pocketing some margin when leasing.

    #1060928
    Skythelimit
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    Thanks for the replies. Quite a variety of opinions!

    #1060929
    jaycar
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    VehicleMods, post: 75727 wrote:
    Try and pay cash if you can without affecting your liquidity. Don’t ever use Flexirent rent, try buy etc on small items. If you run a financial calculator over the figures, you are paying ursurous rates! Buy them and take the depreciation deduction.
    I couldn’t agree more with the Flexirent thing. I used them some years ago and a computer I was leasing from them ended up costing me an arm and a leg. The benefits are good from a tax point of view but bad when you work out a $1000 computer ended up costing nearly $3500 and being worthless at the end of the term only to have to upgrade again.
    #1060930
    beancounter
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    There is no “one size fits all ” answer

    There are many factors to consider in answer to your question. It depends on the structure of your business, it depends on your personal financial situation. It depends on the business plan for your business

    Speak to your accountant about the pro’s and con’s for YOUR INDIVIDUAL circumstances, looking at the complete financial picture relating to you, your family, and your business

    What may be beneficial for other businesses as outlined in this forum may not be approrpriate for yours.

    Yes, this is a great place to start your research, and get feedback, so that you can take a lot more questions and options to your accountant with a clearer understanding of those different options

    #1060931
    WW2010
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    Heres a question for you all…

    What if you actually own the leasing company? A big multinational i work for leases all there vehicles through a car hire company…i found out recently that they actually own it!

    After a bit of digging around i found out that they didnt own it per se…they controlled it…much like a trust structure were its not in your name yet you as a trustee have much control.

    The benefits are in there accounting practices. They get to claim or the lovely benefits that come with rental/leases while never really losing money since it gets shifted through the grapevine and finds its way back to the wallets of the multinational

    #1060932
    MA Accounting
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    Hi

    I think everyone has pretty much outlined what some of the negatives and positives are for leasing and buying.

    You say you will be renewing your equipment every 2-3 years? How easy will it be to dispose of the equipment at that point in time? As previously stated it is sometimes much more of a hassle to donate or sell an item of equipment than to just throw it in the bin.

    If you talk to your accountant you can prepare some analysis to look at the cost of both option. You also need to consider if the lease covers maintenance and ideally scheduled preventative maintenance and compare those costs to arranging for the maintenance yourself.

    In your case, you need to consider the financial and non financial implications in order to make the right decision.

    Thanks
    Mena

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