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Equipment leasing review for financial controllers

Before purchasing new equipment for your business; whether it's a new computer system, upgrade of an existing computer system, new software, a photocopier, telephone system, new office furniture or anything else you need to carefully consider the options available to pay for it.

After all, it's crucial that you acquire the correct equipment for your business and no business owner would commit to buying equipment without first spending time to research all the options and benefits available, yet many people in business pay for their equipment without the same consideration.

This report has been written for business owners or financial controllers just like you with the express intention of providing you with detailed research on all the options, before you part with your hard earned cash. It has been written by and compiled by experts with over 25 years experience of advising all businesses from self employed tradesmen to multinational companies, local authorities, charities, medical boards, schools, clubs and many other types of organisations.

This report will take some of your time to read and we know that you are very busy with many demands pressing on your time, however making the wrong decision in this area could be very costly to your business indeed.

Pay cash

The option most companies who are in a cash rich position will consider. You have the advantage that you own the equipment and don't have to worry about making payments to a finance company and helps keep your monthly running costs down. However, you are often as not investing in a rapidly depreciating asset which will be obsolete in the case of computers almost as soon as it is installed - a frightening thought. In most cases you will have to replace or upgrade it in a few short years only to find that it is worth a fraction of it's value!

Have you fully considered the tax implications to your business? - we'll talk about this in detail a little later.

Of course you have to consider other uses for your capital before tying it up in equipment.

Can it be used to buy stock in bulk therefore saving you money?

Could it be more profitably spent on advertising or marketing helping you attract more new customers?

What about investing the money in the stock market or even in your banks high interest account, this may bring a greater return than leasing your equipment will cost.

You could use your cash to take on more staff or expand your business in some other way helping you make more money.

You could use your cash to settle or part pay any loans you or the business may have outstanding saving you money.

What are the alternatives?

A Bank Loan

There are normally two kinds, term loan or overdraft, let's look at each separately.

Term Loan: This is where you borrow an agreed amount for a specific item of equipment and make payments including capital and interest for an agreed term.

Overdraft: The cost of your new equipment can be added to an existing facility or a new one taken out to cover the cost enabling you to write a cheque to your supplier for payment. You repay only the interest on a quarterly or monthly basis and repay the capital at some time in the future. Overdrafts are in many cases repayable on demand by the bank (at any time to suit them not you) and can be reviewed by your Bank Manager and reduced or even withdrawn with little or no notice and are subject to varying rates of interest and review charges often making them more expensive than you first thought.

A few closing thoughts on bank lending before you shine up your shoes and put on your best suit to go and visit the Bank Manager and request a loan:

If you have other loans for your business already in place check to make sure if you have already signed any personal guarantees as often these can also be used to guarantee future loans without you knowing.

Check what set up and review charges you will have to pay, banks often only quote an interest rate and don't mention these charges until it's too late.

Remember you could be using up a valuable source of credit for your business when you could get funding elsewhere.

The bank may in future request more and more accounting information reports and meetings (where you may have to pay for the Bank Managers time) on how your business is performing, taking up more of your time and making you feel that you are working for them not yourself.

Leasing or Lease Rental

Here you make payments to a finance company, who buy the equipment direct from your supplier on your behalf, for an agreed term anywhere between one and five years or longer for telecomms equipment.

In this case you do not own the equipment (the finance company own it) but it has the major advantage of being 100% tax allowable (more about this later).

The payments are fixed for the term making it easy for you to plan ahead with no unpleasant surprises if interest rates go up.

You can include hardware, software, maintenance and training in one monthly or quarterly payment over your requested term.

In most cases you pay nothing until the equipment is fully installed and it is easy to upgrade or change the equipment as needs change in the future.

There is no strain on your existing credit facilities as you are gaining funding from an outside source and as you are technically renting the equipment it's off your balance sheet as an outstanding liability.

The downside is that you don't actually own the equipment but as you have full use of it and you will probably want to change it in a few years is this really a problem? If you need some comfort here we usually offer the equipment to our customers for a nominal fee upon completion of the term which means you can still own it at the end.

Lease Purchase or Hire Purchase

Basically the same as a term loan from the bank but from a finance company better than going to the bank but without the flexibility and tax advantages of lease rental.

Lease Rental versus Cash Purchase - Real life example

A profitable cash rich professional practise were looking to purchase £40,000 worth of telephone system.

After several months of meetings with suppliers they had sourced the best equipment and software to suit their needs. Now as a partnership they had to explore the most cost effective and tax efficient method of financing.

The following comparison was calculated:

Cash Purchase

Cash price £40,000
Interest lost from withdrawing money from bank deposit account @ 6%
Year one £2400
Year two £2544
Year three £2697
Total Interest lost £7641
Total cost including interest £47,641

Tax Allowance year one 25% Writing Down Allowance = £10,000 x rate of tax at 40% =£4000.
Tax Allowance year two 25% Writing Down Allowance = £7500 x rate of tax at 40% = £3000
Tax Allowance year three 25% Writing Down Allowance = £5625 x rate of tax at 40% = £2250
Total tax allowance over three years £9250

Total cost £47641
Minus tax allowances £9250
Total cost of paying cash £38,391

Three Year Lease Rental

£40,000 x quarterly rate of 98.75 = twelve quarterly payment of £3950

Total cost of leasing over three years £47,400
Minus interest saved from keeping the money on deposit @ 6% = £7641
total cost of leasing over three years £39759
Minus tax allowances 100% of three year rental = £47,400 x rate of tax £40%
total tax allowance £18,960

Real cost of three year lease

total payments £47,400
minus interest lost on capital £7641
minus tax allowances £18,960

Total cost £20,799

Cost comparison to paying cash

Real cost of paying cash £38391
Real cost of three year lease £20799

Saving from three year Lease over cash purchase £17,634