To lease or to buy? Make the right choice
- Gé Sletterink
- How to
- 2 August 2022
- Edited 4 January 2024
- 3 min
- Managing and growing
Companies need assets like cars, machines, or photocopiers. When it comes to getting your hands on assets, you have 2 options. You can buy them or lease them. Which choice is best depends on the type of asset, your financial situation, how it will benefit your company, and the purchase price.
Business assets are investments you use in your business that are not intended for sale. When you lease business assets, you pay a leasing company. When you buy business assets, you pay for the assets yourself. Before you choose to buy or lease, you need insight into your company’s financial situation. You can also factor sustainability considerations into your choice.
When you lease assets, you finance them through a leasing company. You pay a monthly fee to use the assets. You can lease almost anything that drives, rolls, or has a serial number. You can lease vans, photocopiers, machines, coffeemakers, IT equipment, POS systems, LED lighting, and office furniture. But you can also lease your shop, gym, or warehouse inventory and communications devices. The lease type you choose, like financial lease or operational lease, can have tax consequences. Leasing can be cheaper than the interest you pay on a business loan.
When you buy an asset, you own it. As a result, you are also exposed to business risk if something happens to it. You are responsible for financing, servicing, repairing, and insuring the assets you buy. When you own an asset, you do not have to pay a monthly rental fee or enter into a contract.
Rent-to-own is another way to buy an asset. Instead of buying the asset outright, you enter into a payment plan and pay in installments. The rent-to-own contract makes you the beneficial owner, and you will actually own the asset after you pay the final installment.
Buying or leasing sustainable business assets can be cheaper, because you save on purchase costs, energy, and maintenance. There are multiple ways to go sustainable.
Sharing and borrowing
You could agree with other entrepreneurs to share each other’s assets. Alternatively, you can simply borrow each other’s assets for free. You can also invest in a forklift or trailer together, for example. Record the agreements (in Dutch) in a contract, or at least in an email. This will prevent issues later on.
You can rent an asset if you only need it for a short period of time. If you only need a cherry picker for two weeks, it is a lot cheaper to rent one than to lease or buy one.
You can also buy or lease used assets instead of new ones. This is often cheaper and more sustainable.
Apart from electric cars, using electric vans, mopeds, bicycles, and trucks can also help you run a sustainable business. Currently, the prices of electric cars are higher than of comparable fuel models. However, the government has lots of schemes and grants to encourage people to opt for EVs by introducing financial benefits.
Before making the decision to buy or lease an asset, map out the financial implications.
- Do you now have money available within your company for the purchase? Then check whether you have sufficient working capital left after the purchase. When purchasing with your own funds, you can deduct the usage, maintenance and depreciation costs from your profit. The asset will appear on your balance sheet.
- When financing a purchased asset, the bank will finance up to a certain percentage of the purchase price. For the remainder, you have to find another source of financing. The lender also often requires security for the amount of the loan. For example, or a personal guarantee from you as an entrepreneur. A bank often charges a lower interest rate compared to a leasing company. With a financed purchase, you can deduct usage, maintenance, depreciation and interest costs from your profit. The asset and the loan will appear on your balance sheet. This affects your solvency. As a result, you may be able to borrow less in the future.
- With leasing, you make a monthly financial commitment for a longer period. Depending on the type of lease, part of the lease amount is deductible from your profit. Only with financial leasing will the asset appear as an asset on your balance sheet. You record the lease liability as a debt. As with financing, this affects your solvency. With operating leases, you include the lease liability in the notes to the balance sheet.
For a good overview, include the financial consequences of your choice in your financial plan.
Making a choice
You know your situation, needs, and wishes and have crunched the numbers. If you choose to buy or finance an asset, consider at least 3 different suppliers. If your prefer leasing the asset, explore what type of leasing best suits your company and the asset. Get at least 3 quotes to compare. For sustainable solutions such as buying, borrowing, or renting together, contact other entrepreneurs in your network.