Lease or buy?


Invest in growth without tying up cash flow

Imagine you have an opportunity to acquire a major new client in a neighbouring state – but first you need to quickly establish a new office, fit it out and deploy a small fleet of vehicles.

Do you save up your cash flow to finance the investment? Or do you finance it through a lease or commercial loan?

Very few businesses would have enough cash on hand to fund that move outright – so the decision ultimately comes down to whether you lease the assets, or borrow to own them outright. And the right answer will depend on four key questions, according to Macquarie Leasing specialist Terence Hammond.

1. How quickly will you need to upgrade the asset?

Whether it’s a car, printer or ergonomic chair, think about how long that asset will generate value for your business.

It doesn’t make sense to finance an asset for longer than its useful life.
Terence Hammond, Macquarie

“In general, it doesn’t make sense to finance an asset for longer than its useful life,” explains Hammond. “With technology that changes really quickly, like computers, it could be obsolete in two years and that’s why leases may suit those assets better.”

Nick Beverley, Business Development Manager with Macquarie’s asset finance divisions, says many businesses aren't aware of the range of finance options for technology.

“When professional services firms decide to move into the cloud, for example, they may need a number of new mobile devices, laptops, desktops and other hardware,” he explains. These are business critical assets, but they’ll need upgrading in a few years.

“You’ll probably only want to use them within the warranty period – and that’s where a rental agreement or operating lease gives you the flexibility to return and upgrade and smooth out cash flow with a monthly cost.”

On the other hand, you may prefer to own larger equipment or vehicles at the end of the finance period – and write off the depreciation.

A finance lease also allows you to own the asset at the end of the leasing period, with a final residual payment.

2. Is your cash flow highly variable?

Both leases and loans work effectively to smooth out cash flow bumps, by letting you make predictable monthly payments. For cars, the cost of maintenance, insurance and even fuel can also be incorporated into your regular lease payments to keep unexpected bills to a minimum.

Hammond says most of Macquarie Leasing’s clients use a chattel mortgage to finance larger asset purchases.

Both leases and loans work effectively to smooth out cash flow bumps, by letting you make predictable monthly payments.

“We can fund almost anything that adds value to a business – from office furniture to smart energy technology, vehicles for commercial use or shop fit-outs. In many cases, it's for businesses that want to capture market share sooner with a growth opportunity like a new contract.”

With a chattel mortgage, you own the asset straight away but can keep your cash flow under control because you haven’t paid for it outright. The loan is typically based on the asset’s valuation. You can choose the term (up to five years) and alter your deposit or final instalment to adjust your repayments. This flexibility lets you free up your cash flow even further during the times of year you need it most.

On the other hand, with a finance lease your financier owns the asset through the life of the lease. Check the timing of the residual value payment to make sure it works with your cash flow cycle.

3. How much flexibility do you need?

Leases let you scale your assets up and down to suit business demand.

“Some people don’t want to be tied to a particular type of vehicle – they’d rather hand it back and upgrade when it suits them,” says Hammond. “However, you also can't make modifications to a leased vehicle, and it may not always be the cheapest option.”

This is also an important question if you’re considering buying your business premises, rather than renting them. If you need to relocate or increase floor space to accommodate growing staff numbers it may take more time to sell and move than to negotiate a new lease.

With many building owners and managers, including strata firms, focusing on energy efficiency, Macquarie has developed specialist expertise in funding energy assets and can introduce clients to accredited suppliers.

“Often the first step is improving overall efficiency, by investing in automated lights and LED bulbs for example,” explains Beverley. “Then they use solar panels to capture energy, and technology to distribute it through the building effectively.”

These assets can have a very long depreciation life, so although the lease or financing may be paid off in seven years they may have a valuable life of 15 to 20 years.

4. What are the tax implications?

It’s important to ask your accountant for advice on the tax impact of any major asset purchase.

Many operating leases will now be required to be on the balance sheet from 2019 with the introduction of the new International Accounting Standards Board (IASB) IFRS 19 Leases. However, it’s likely smaller assets like computer equipment and mobile devices will be exempt – so they can still be treated as an expense on the Profit and Loss, rather than a liability on the balance sheet.

And there are certain tax outcomes in relation to the different types of leases and loans.

When you purchase the asset with a chattel mortgage or other form of asset finance, you may be able to claim the GST you paid as an input tax credit, the depreciation and the interest payments as tax deductions.

If you’re leasing, you can claim the rental cost as a tax deduction and also claim any GST back through your BAS. And if you prefer to use a novated lease to finance your vehicles, there’s also the opportunity to reduce your personal tax liability.

So should you finance to own or finance to return the asset? Both leases and loans can help you maximise your cash flow with regular fixed payments – the decision ultimately comes down to the type of asset, and how you plan to use it for growth.

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This material has been prepared by Macquarie Bank Limited ABN 46 008 583 542 AFSL & Australian Credit Licence 237502 ("Macquarie") for general discussion purposes only, without taking into account your personal objectives, financial situation or needs. Before acting on this general information, you must consider its appropriateness having regard to your own objectives, financial situation and needs. The information provided is not intended to replace or serve as a substitute for any accounting, tax or other professional advice, consultation or service.