Modern businesses have many moving parts. Creating, manufacturing or selling a product or service is nowhere near as simple as it once was and a variety of external concerns from politics, to exchange rates and the environment need to be taken into account. Among these concerns are the finances and options which are opened up when one considers purchasing equipment, whether it's IT infrastructure or heavy machinery.
The standard process when bringing in new hardware is to weigh up the benefits of a bank loan over a cash payment. There is, however, a third option that is currently making waves – leasing.
As society develops it becomes clear that the benefits of one form of payment over another come down to far more than finance and the answer is not simply a matter of jumping at the first sale you see. Below we break down the variety of benefits and challenges of buying versus leasing and to try help you make the decision for your business.
Choosing to buy
Traditionally, companies have always opted to buy the equipment they need to run their operations. Having ownership of a new product is seen to be the best way to ensure you have the items you need on hand, when you need them. Buyers tend to believe that the increased initial expenses are well worth it as buying equipment adds equity and status into the company, and while this can be true when items have a long work life and are unlikely to become outdated – think the humble office desk.
Additionally, buying offers some tax incentives to the owner. SARS allows companies to deduct the full cost of on any asset that costs less than R7000 as a write off, provided it is necessary to the operation of the business. Anything more expensive can be deducted as Wear and Tear, which allows a percentage of the value of the good to be written off each year, until the full expense has eventually been claimed back.
Of course there are downsides to buying too. Almost everyone has worked at a company with worn out equipment, and a dark storage room, generally in the basement, packed with decaying computers, broken chairs, printers and photocopiers from a bygone era. This is all a reflection on the main cons of buying.
Having to wring the most out of the tax deduction requires companies to sometimes use old equipment that is depreciating in value and has long since ceased to be functional. Perhaps it's IT technology that is not up to date with the latest in security software, bug fixes or even simple technological advancements or perhaps it's a bulldozer that does not have the necessary size to function as necessary?
Staff are then forced to use outdated machinery to try and match competitors who may be using the latest devices or machines, and at the end of their lifecycles, ethical disposal of these items is near impossible. Surely, you can't just dump the stuff? Right? This is the equity you thought you were building up in the business? Donating this equipment to a school or charity is also not feasible, as all you are really doing is passing on the problem of dysfunctional equipment to someone else. This is why you have the dark storerooms.
When to lease?
The other option is leasing. Presently, many companies don't like to look at any option other than owning outright as there is a belief that even depreciating assets better serve the company in-house. This combined with the fact that on-paper, leasing can work out to be marginally more expensive over the term of the contract, leads many to commit to taking long term loans to bring in the equipment that they need.
Astute managers will, however look to the many benefits offered by leasing and also take note that not all deals are structured the same way – it can, in fact, be even cheaper to lease than it is to buy.
Firstly, leasing requires no initial outlay of cash, nor a large loan to get the equipment you need. This frees up funds earlier in the process, which can then be spent on other necessary advancements in the company such as marketing, employing extra sales staff or expanding the factory floor. This alone can have a significant impact on the projected future growth of a company. That extra cashflow, invested wisely, can therefore more than offset the sometimes slightly larger cost of leasing over the life term of depreciating assets that would otherwise be destined for the storeroom.
Further, just like buying, there are tax incentives to leasing items. In this instance you would no longer claim for depreciation of an asset but rather use the lease as a deductible expense. The other financial benefit is stability. In a world of rampant interest and inflation the payment on loans can fluctuate wildly making cost projections difficult to properly ascertain, while with leasing this monthly risk is passed on to the leasing company as your monthly expenses can be set at the start of the contract.
And that's not where the benefits end. Depending on the contract, leasing allows companies to upgrade to more recent technology much more easily. Leasing is great for equipment that becomes outdated quickly as the leasing company can assist in ensuring the equipment operates as expected and for keeping it maintained and secure for the full terms of the lease, while also giving you the option to upgrade as needed.
Leasing companies may also offer the option to lease equipment which is not brand new for a cheaper amount than buying a new product. While there is still some reluctance from companies, this is proving to be unfounded, as this equipment will have been refurbished and updated and would be as good for use as a new product.
Finally, at the end of a product's lifecycle, if the equipment is returned back to the leasing company, they become responsible for the sometimes expensive or difficult process of ethical disposal, saving you from renting that dingy basement storeroom. This then assists your company in meeting sustainability targets and reduce its environmental impact.
Some of the more reputable leasing companies such as InnoVent have, what they term a “second life solution”, in which they take old IT equipment from you, refurbish it and supply it to places where it can still be successfully used thereby extending the item's lifecycle, and lowering the impact on our planet. TIP: Making use of this option can sometimes even get you a discount on the contract.
At the end of the day, companies should consider the issue of buying versus leasing very carefully as there are significant cost, tax and cash flow implications. The lifecycle of a product, disposal and sustainability of its use should also be considered with companies now required to think about how they keep their employees working with the best products possible, without unnecessarily harming the environment in the process. At the very least it makes sense to look at all the options and a consultation with a respected leasing company such as InnoVent should be the first stop for any modern corporate buyer.
For more information, get in touch with our team today.
1. The specific article is 4.3.5 “Small Items”: https://www.sars.gov.za/wp-content/uploads/Legal/Notes/LAPD-IntR-IN-2012-47-Wear-And-Tear-Depreciation-Allowance.pdf