Is Leasing Everything Risky for My Business?
In today’s world, we are leasing assets a lot more regularly. According to Dataforce, Europeans are leasing and renting cars more than ever before, including both short-term and operational leasing. Over the last five years, the leasing market skyrocketed from 2.6 million to four million due to the culture of ownership evolving.
According to Head of Product at Dataforce Julian de Groot, people are more interested in reducing the risks associated with owning assets and having to potentially deal with expensive repairs. Indeed, renting part of your assets and equipment can be a smart move – for example, looking at van leasing deals for your company’s fleet but owning some machinery and equipment.
Leasing assets grants businesses, organisations, and individuals the ability to possess an asset while paying costs to cover depreciation and interest. Statistics from the Finance and Leasing Association (FLA) report that the total asset lease business grew by 106 per cent in May 2021 compared to the year before, with the commercial vehicle finance sector seeing new business increasing by 126 per cent.
Here, we look at whether leasing everything is risky for your business, discussing both the advantages and disadvantages.
Spreading the costs
Instead of fronting large sums of cash to buy an asset outright, businesses can instead spread their costs by leasing over a longer period. This can also be timed to overlap with expected income, covering costs while maintaining a predictable, stable level of cash flow.
Can be more costly
In some cases, renting an asset can end up being more costly in the end than if you bought it outright – but not always. However, this wouldn’t be an obvious loss, as it would be spread over time. Although leases bring with it the addition of interest to pay, you could benefit more financially through leasing rather than buying it, but this would depend on the asset and company you choose to sign with.
Your business can get taxable deductions on lease payments, which effectively lowers their tax bills. For vehicle lease payments, your business can claim back:
- Up to 50% of monthly payments on tax
- Up to 100% of the tax on a maintenance package
- If the vehicle's CO2 emissions qualify, leasing costs can be tax deductible.
You don’t own it
Probably one of the more obvious disadvantages is that when you don’t buy an asset, you don’t own it. Naturally, this means you will forgo the risks of ownership but also the benefits. For example, if you're leasing land or property for your business, you won't benefit from any appreciation in the value of land. Lease expenses ultimately affect the net income of a business – considering you wouldn’t benefit from any appreciation in value, this results in limited returns for any shareholders.
The latest technology
Renting assets means you will get the latest technology and upgrades without having to buy and sell anything you own to keep up to date. You can also have access to expensive and innovative equipment that you might not have if you bought it outright. For businesses operating in a competitive market such as the technology industry, there is the risk of technology in a purchased product becoming rapidly obsolete as it is continuously innovated and improved. By renting, you can trade your assets in for the latest and best.
Leasing equipment removes the risk associated with ownership. Especially with the unprecedented year we have had with the COVID-19 pandemic, uncertainty and market fluctuations can make purchases risky. Combined with repair costs and the possibility of it breaking down entirely, you could end up forking out more money for something you own instead of simply leasing it and letting the leasing company deal with repair charges.
Access to other loans
Leasing can be considered a form of debt until it is all paid off, so if all of your assets are rented instead of owned and you’re making monthly payments to cover them, this could affect your access to other loans.
When applying for loans, any loan company will view all of your outgoings – the amount going out could impact your chances of your application being accepted, depending on how much cash flow you have available.
Instead of relying on leasing or owning entirely, you should diversify your property and both lease and buy.