For a long time now, buying or leasing industrial equipment has been a hot topic for debate, especially among SMEs. Globally, the leasing market stands at $1355.3 billion in 2021, with a growth of 14% from 2020. The increase is due to companies revamping their operations as they recover from the COVID-19 impact. Asia accounts for 36% of the global leasing market in 2020 and is rising as more companies open up to leasing.
Each business is unique, and borrowers must decide to buy or lease business equipment on a case-by-case basis. But here are some of the essential questions to consider before making the lease v/s buy decision -
Q1. What are the advantages of leasing equipment?
Most new businesses have very minimal capital reserves to invest in equipment. With equipment leasing, companies can acquire the latest equipment and assets necessary for operations with minimal expenditure. SMEs can obtain the equipment to conduct their operations without significantly affecting their capital reserves.
From a cash flow perspective, leasing is more attractive than buying as leasing eases out payments over monthly rentals and provides tax benefits. Lease payments are tax-deductible as business expenses and ultimately reduce the net cost of the lease.
Leases have more flexible terms and are easier to obtain. Leasing equipment is an advantage if the company has average credit ratings, no credit history, or needs a more extended payment plan.
Leasing is the solution for businesses employing equipment that is prone to obsolescence. With leasing options, companies can obtain equipment like construction equipment, computers, IT infrastructures that may become obsolete within short periods, use them for the necessary duration, and return it when the purpose is served. Lessees can pass on the burden of the lease to the lessor before the equipment becomes obsolete.
Q2. What are the attributes to be mindful of before leasing equipment?
It is essential to consider the cumulative costs of leasing equipment vis-à-vis outright purchase. Leasing, in the long run, could become slightly more expensive than purchasing. However, companies that do not have the capital to buy will have to borrow at higher rates to make that purchase. Borrowers must compare the cost of acquisition via leasing and borrowing before making the final decision.
Borrowers must consider how important it is to own the equipment. Specific forms of lease do not offer ownership. If a company is looking to build up its balance sheet, leasing equipment is not the right choice.
If the direction of business changes (which is quite common in newly formed companies) or the company stops using the equipment, they are still obligated to pay the lease amount for the entire duration of the lease period. Not many lease agreements have the in-built flexibility to cancel leases mid-tenure without paying penalties.
Q3. What are the advantages of buying equipment?
The biggest advantage in buying business equipment is to gain ownership of the equipment. This advantage is beneficial when the equipment has a long shelf life and is unlikely to become technologically disrupted soon. By owning equipment, the company can make any modifications to the machine as per their requirement. Moreover, the company has complete control over the type of equipment they wish to buy and is not limited to what the leasing company offers.
Buying equipment allows companies tax incentives. All tangible assets like heavy equipment, machinery or furniture acquired and put to use for more than 180 days in the financial year are tax-deductible items. As per the Income-tax Act, 1961, a taxpayer can claim depreciation on an asset.
Q4. What are the attributes to be mindful of before buying equipment?
Buying equipment, especially for a new company, requires high upfront investments. For some companies, the budget might be tight initially, and purchasing expensive equipment is not an option because the cash needed initially is too high. Most lenders expect borrowers to shell out an initial down payment before accessing a loan. Additionally, borrowing money tie up credit lines. Borrowers must have sufficient access to capital to manage other company operations before buying equipment on loan as they are long-term debt obligations.
Borrowers must consider the lifecycle of an asset and its utility. When a company buys equipment, they are bound to keep it even when it gets outdated and inefficient. Even though ownership is the most significant advantage when a company buys equipment, it can also be a disadvantage if it purchases high-tech equipment. There is a risk of the equipment becoming technologically outdated, forcing them to reinvest in new equipment earlier than planned.
No one solution fits all in the buy v/s lease debate, and the decision may vary depending on the type of industry, financial position, and equipment needs. Tata Capital offers customised solutions for buying equipment via loans and lease options so that companies can choose a financing alternative that fits them best.