Whether you need to purchase a vehicle, some computer equipment, or a bigger warehouse to expand your business or to operate more effectively, take the time to consider how each purchase might impact your operating capital.
Think about whether leasing is the way forward. If you decide to lease an asset, you won’t have to hand over a large chunk of your business’s cash. That cash could maintain your reserves, be used to invest in more stock, or to develop a new product or service.
Sit down and calculate the potential impact to your business’s cash flow if you were to:
By making loan repayments over time, you’ll be able to pay off a larger capital purchase that may have been impossible to afford with cash.
Paying loan installments can also make it easier to afford the assets your business needs without stripping it of its available funds.
It always pays to do your due diligence before you sign a purchase agreement for any new business assets. For example, the cost of machinery and equipment can vary enormously, so it's worthwhile comparing prices of different brands, manufacturers and suppliers.
If you know that the quality of an asset will play an integral role in your overall business success, it’s probably a wise idea to purchase it brand new. Just keep in mind that you might not always be able to claim the entire amount paid as a business expense – the values of some assets are depreciated over several years.
Buying secondhand offers a way of reducing your business expenses. Take the time to shop around to see whether you can locate a used item in good condition that will be reliable.
When you lease an asset, you’re simply renting it for a set period of time. The leasing company retains ownership of the asset while your business has the exclusive use of it for the term of the lease.
A lease will typically run for anything between 24 and 60 months. Once the agreement is entered into, both parties are obligated to see out the term of the lease.
Throughout the course of the lease agreement, you’ll pay the lender regular installment payments for the right to use that asset. For accounting and bookkeeping purposes, some leases can be classified in the same way as an asset purchase and can be capitalized on your balance sheet.
However, purchasing your own asset can be a cheaper option in the long run. For example, if you lease a $200,000 piece of machinery on a regular basis over a long period of time, you could find you've spent more than the purchase price.
Before deciding whether to buy or lease, it's prudent to take a few important factors into account, such as:
In cases where technology is changing rapidly, you might prefer to lease the asset your business needs instead of buying it. There are also options where the lease agreement can include upgrading the asset to a newer model once the agreement expires.
Likewise, some lease agreements may also include maintenance and servicing costs. By leasing some assets, you could avoid paying any upkeep costs associated with them, saving your business money over the long term.
It's important to look closely at any lease agreement before you sign it. You may find that some agreements:
Always be sure that you understand the terms of an agreement before you sign it. It's also smart to run a cost comparison and a cash flow analysis between leasing an asset and buying one with funds from a small business loan.
There are always different options available for funding your business's asset purchases, including:
If you decide to buy, always check with your accountant about any planned business asset purchases. Discuss the potential impact the purchase may have on your cash flow and ask what alternative options might be available.
You may even be eligible to apply for a Small Business Administration (SBA) loan to help fund the assets your business needs.
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