04 Mar Leasing vs Finance vs Cash?
Should I lease or finance or pay cash?
This is a question we get asked quite a bit – should I lease or buy? And if buying, how should I pay? This often comes up when people are talking about vehicles, but also applies to IT and other equipment.
First off, a bit of terminology: what is a Finance Lease and what is an Operating Lease?
– A finance lease is just like a term loan, with the asset usually becoming yours at the end – often there is a balloon payment (a big final payment to make the asset yours) or a predetermined buy-back; car companies are big on these as it incentivises you to buy another car at the end of the finance period.
– An operating lease is all together another creature – it is like a long-term rental arrangement and may have factors like maintenance included, or that may be the lessee’s (that’s you) responsibility.
Then, of course, there is an old-fashioned loan, or (the even more old-fashioned) paying cash.
All have advantages and disadvantages.
– With an operating lease, often the responsibility for maintenance sits with the lessor, and in some circumstances, it can offer some tax advantages. However, at the end of the lease period, you don’t have an asset – it goes back to the lessor, and for some types of equipment, it is more expensive.
– A finance lease can offer cashflow advantages in the short term, but the flipside is that you pay for that down the track – it can present a cashflow disadvantage toward the end of the finance term.
– A traditional loan is easy to understand and can give you similar negotiating power as being a cash buyer, but depending on your lender, the cost can be high.
– Paying cash offers you the best negotiating position, but you have to have cash available, and it isn’t always practical to tie up your capital on one piece of kit.
At the end of the day, what is right for you will depend on your circumstances. Thinking of adding/replacing/upgrading a substantial piece of equipment? Contact us and we can help you figure out what the best option is for you.
