For businesses looking for new assets to add to their operations, there are a few different financing options available. Investing in capital equipment can be quite costly so deciding on the best arrangement will require some careful consideration and research to understand the long term implications.
Hire Purchase vs. Equipment Leasing
Outside of obtaining a traditional bank loan or purchasing the equipment outright, two of the most popular methods of financing assets are hire purchase arrangements and leasing. Both arrangements have different implications to your business and will be accounted for differently in your balance sheets.
Hire Purchase – in a hire purchase agreement, the lender takes ownership of the equipment for the duration of the contract where the business makes regular payments for equipment hire. At the end of the agreed upon term, the ownership of the asset is turned over to the borrower – this can happen automatically or with the payment of a final option own fee.
Because the asset is finally owned by business, the interest component of the repayments and the depreciation on the equipment may be claimed as tax deductions. Hire purchase arrangements can be helpful for businesses looking to purchase assets in the long term.
Equipment operating leasing – in a commercial leasing arrangement, the lender owns the equipment and the business makes regular payments for its use. There is generally no option to own the equipment at the end of the lease term and any purchase would need to be separately arranged.
Because the asset is not owned by the business, the monthly lease payments may be tax deductible as a business operating expense. Commercial leasing arrangements are ideal for businesses that are looking to use the equipment through its useful life and where direct ownership of the asset is not a requirement. This can be especially useful for industries where technology is regularly updated as it can often be the case with laser hair removal machines. The business can return the asset to the lender without the complex considerations of storage or disposal.
These options will have different implications depending on the specific nature of your operations, such as whether you do your accounting on an accrual or cash basis. Meanwhile, you may also want to look into other types of financing available including a chattel mortgage or a finance lease.
Find out more about your options with asset finance for your business. Visit www.flexicommercial.com.au for more information on equipment leasing.
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