August 15, 2023
Leasing vs. Buying Cleaning Machines: Making the Financial Choice for Your Business
Leasing vs. Buying Cleaning Machines: Making the Financial Choice for Your Business
In the world of business operations, efficiency and cost-effectiveness are paramount. This extends to the equipment you use, including cleaning machines. When it comes to acquiring these essential tools, organisations are faced with the decision of leasing or buying outright.
In this blog, we’ll delve into the concept of finance leasing, the benefits it offers to businesses, and explore the age-old question: is it better to purchase cleaning machines outright or to lease them?
Understanding Finance Leasing
Finance leasing is a credit agreement primarily embraced by businesses, encompassing limited companies, partnerships, and sole traders. This model allows businesses to acquire necessary assets without the upfront financial burden of purchasing them outright. In essence, finance leasing acts as a rental or hire agreement for equipment, offering businesses the flexibility to use assets without tying up their capital.
The Mechanics of Leasing in Numbers
Let’s illustrate how leasing works with an example. Imagine you need a cleaning machine valued at £5,000.00 + VAT, and you opt for a 5-year lease term. The monthly payment, which includes VAT, would be £112.52. This translates to a weekly equivalent of £25.97 over 60 months. The total payments over the lease term amount to £6,751.20 + VAT. The fascinating part is that businesses can reclaim 19% tax on the total lease payments over 5 years, resulting in a reclaimed amount of £1,282.73. This brings the net cost of the lease down to £5,468.47 + VAT.
The Tax Advantage of Leasing
One of the primary motivations for companies to choose leasing over purchasing equipment is the substantial tax advantage it offers. Lease rental payments are 100% tax deductible, allowing businesses to write off these payments against their tax bills. This leads to significant savings in the effective cost of acquiring equipment through lease rental. Depending on the applicable tax rate, this could translate to savings between 20-40% of the lease payments.
By classifying payments as direct operating expenses, leasing minimises short-term taxable income. This approach ensures that lease payments can be offset against taxable profits, while capital allowances are retained by the lessee. Furthermore, the ability to reclaim VAT on monthly payments adds another layer of financial benefit. This advantageous status as a “lease” rather than a “liability” on a company’s balance sheet can be appealing to financial institutions, contributing to what’s known as ‘off balance sheet’ financing.
Ownership Considerations at the End of the Lease
One significant distinction between leasing and outright purchasing lies in ownership. With leasing, the title of the equipment remains with the lessor, which means it doesn’t appear on the lessee’s balance sheet. Consequently, depreciation over a fixed period is not required. When leasing agreements involve third parties like Kennet, the equipment’s title transitions to the lessee after an additional monthly payment. This arrangement grants businesses the full benefits of leasing without the financial complexities.
Benefits of Leasing Cleaning Machines
Flexibility: Finance leases provide businesses with options regarding agreement length, repayment schedules, and end-of-lease choices.
Preserved Cash Flow: Opting for leasing helps retain capital within the business for other essential investments.
Financial Planning: Lease repayment profiles empower businesses to budget accurately throughout the equipment’s lifetime.
Tax Advantages: The ability to deduct lease payments from taxes is a substantial benefit for profit-making entities.
Competitive Edge: Utilising the latest equipment through leasing ensures competitiveness and cost-efficiency.
Efficiency: Leasing offers quick turnaround times, enabling businesses to acquire needed assets promptly.
Upgrade Opportunities: At the lease term’s end, businesses can choose to continue using the asset for a nominal payment or upgrade through another lease.
Points to Keep in Mind
While the advantages of leasing are evident, it’s crucial to remain mindful of potential challenges. Non-payment could negatively impact the credit rating of the business and any guarantors involved. In such cases, repossession of the leased asset might occurs
Leasing or Buying: The Verdict
In the realm of cleaning machines, leasing emerges as a compelling option for businesses seeking cost-effective ways to acquire necessary equipment. The tax advantages, flexibility, and potential for equipment upgrades make leasing an attractive choice. By minimizing the financial strain of outright purchases and preserving capital, leasing allows organizations to focus on their core operations while maintaining a competitive edge.
Ultimately, the decision to lease or buy hinges on the unique needs and financial situation of each business. By carefully evaluating the benefits and potential drawbacks, organizations can make an informed choice that aligns with their operational goals and financial strategy.
*This article was written in Aug 2023, please check with your leasing provider or accountant around current tax laws before making a decision.
For a consultation with one of our specialists, get in touch with us on 01829 773 015
3 Steps Towards Creating A COVID Safe Facility
Next Webinar
