Purchase Or Lease the Business Question
Purchase Or Lease the Business Question
Purchase Or Lease the Business Question
Over the past few weeks we have written a lot about tax (due to the budget), increasing fuel prices (due to the budget), and some other stuff. So I thought that today I would write something completely fresh and not high in the news.
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Over the past 10 years I have spent so much time with companies from across the world and no matter where they are or what they do they all face similar questions. The most common questions you find in companies are-
Do I expand, or do I maintain?
How do I finance this?
I'm struggling to get paid how do I speed this up?
And one of the more common questions that I came across was when a company either decided to get a fleet of vehicles or renew their fleet of vehicles. They would ask do I buy or do I lease, and a more complex question was do I sell and lease back. Now before we get into the subject I want to say I am no accountant but I have many years experience in this field. So on to the first question.
Buy or Lease
This is a very good and quite complex question asked by every business owner. First when you purchase a vehicle through your business the value of the vehicles go onto your balance sheet. Now for any ratings agency or banker this always looks good, as there is tangible value on your balance sheet. If you decide to purchase you then have the question how do I finance these, many vehicle supplier will offer finance on any time of asset purchase however the rates of interest can be quite high so if you decide to look at this make sure you shop around to check your options.
Now having an asset on your balance sheet does have varying consequences. Firstly once the asset is on the balance sheet its within the business, therefore the asset must live under company rules. This means that they are depreciated through the profit and loss, and to remove them there must be a suitable disposal charged to the accounts. Now charging depreciation is great as its a non cash reduction in profit values reducing your tax liability (and everybody like reducing tax).
As the asset is on the balance sheet you have to remember that it is the property of the business. Without beating around the bush this basically means if you lose the business you lose the asset. This is the same with any asset purchase, if your company owns the building it trades from if the business subsequently fails the building will be sold and funds utilised to pay off any creditors.
Leasing is an off balance sheet way to use an asset. At no point does the company own the vehicle, it is owned by the lease company and the business using the asset rents the asset for a fee. This fee comes straight off the bottom line of the business as a charge against profit. Unlike when an asset is owned normally you will pay a small monthly fee that covers breakdown or any sort of technical damage, so you get piece of mind that your fleet will be on the road as much as possible.
When a leasing arrangement is in place there is a limited time of that lease, at the end of that period the vehicle can be given back or sometimes the lease can be continued or the lease continued for a lower rate/price. There is a real positive from this as essentially when you replace your fleet you don't have to arrange a sale or accept a poor trade in against your asset. You can also easily increase or reduce your fleet at the end of the period.
Each individual company will have their own desires. Many will want to amass assets held on their balance sheet and others will like a flexibility of a lease. Many companies have a mixture of the two, for solid contracts a vehicle is purchased to service that contract. Where a contract is new or short period a lease is ideal for this situation.
Sale and Lease Back
In a time where credit is difficult to achieve sometimes you have to be creative with your available assets to generate working capital. Asking for finance with no collateral is a difficult situation if you are looking for any amount above around 2-3k. As not all businesses or owners have the availability of a property you may want to look at your fleet for a means of security.
If you have any more than 3 vehicles in your fleet you can normally find an asset finance company who will provide a sale or lease back facility. Essentially on commencement of the facility a lump sum is paid into the business on the transfer of ownership of the vehicles. This is also a great way to remove the asset from the balance sheet and generate some needed cash.
Another great thing about this arrangement is that it is normally very quick. It easy to value as there is book and list price comparison and the rates are normally much keener than normal unsecured finance.
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