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Buying Verses Leasing
Whether you are a sole trader a PLC or a government dept., cash flow is life blood of business and when comes to spending large chunks of it on equipment sooner or later the same question will come up, is better to buy it out right or to lease it. Well, here we will try to show you that from a cash flow point of view leasing has considerable advantages.
An up and coming sales company has decided that it needs to update it's aging computers with new laptops. They have decided to acquire ten laptops at £1000 + vat each, that's a total cost of £11,750 inc VAT, they have also decided that they will look to replace them with new models after 3 years to ensure that they don't fall behind the the technology stakes again, the following two scenario's show the financial outcome of what buying verses leasing would be.
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Scenario 1
Buying outright
Our company buys the 10 new laptops for a total of £10,000 + VAT, Immediately they are £11,175 down but as they are VAT registered they can claim the VAT back at the end of the current quarter in 3 months time.
And that's it, your money is tied up in the new equipment, so if you had other plans for the £10k then your going have to get it from else where. Over the the next three years our company can claim back 25% of the balance per year
Initial Purchase Price £10,000
• Year 1
25% of £10,000 = £2500 - Balance = £7,500
• Year 2
25% of £7,500 = £1875 - Balance = £5,625
• Year 3
25% of £5,625 = £1,406 - Balance = £4,219 So at the end of the laptops 3 year working life our company has been able to claim £5781 against pre tax profits. |
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Scenario 2
Lease Rental
Our company leases the 10 new laptops over a 3 year period paying 1 initial payment of £343 + VAT, then 35 monthly payments of £343 + VAT. So out of their original £10,000 + VAT budget they still have £9657 to spend on stock which they can sell for a profit, something that could not have been done if they had bought outright, that continues in ever decreasing amounts of the next 3 years giving them plenty of opportunity to make more money whilst having the use of the new equipment which helps them to become more efficient and more profitable. This really is a case of having your cake and eating it.
But there's more, not only does our company have the money to spend on more stock, the payment they make on the lease are 100% tax allowable against any pre-tax profits. As shown below
Year 1 100% of £4,116 (12 x £343)
Year 2 100% of £4,116 (12 x £343)
Year 3 100% of £4,116 (12 x £343)
Total that can be claimed back against pre tax profits is £12,348 |
Even though the lease rental has hire costs of £2348 + the £10,000 over the 3 years the ability to claim all of this back compared to the £5781 for the outright purchase shows the tax benifits of leasing. |
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Conclusion Why 'make do' with equipment that 'won't do'? The leasing solution can give you the tools you need and not what your bank account dictates to you.
So leave your overdraft in tact and take the pressure off. After all today's cutting edge equipment will be tomorrow's 'old hat'. It's the flexible that prosper, not the companies that hang on to old, outdated equipment. As any financial advisor will tell you, investing in a fast depreciating asset is not a wise move.
Let's face it, for most people, if you waited until you had the cash to buy a house, you'd be waiting for a very long time and may never buy one.
* Weekly equivalent on the current entry level lease qualifying laptop which is the Fujitsu Amilo P3560 MF032GB
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