What is a Lease?
- Basically it is a loan for 100% of the cost of equipment.
- It is an agreement with the Owner or Lessor of the equipment.
- You pay back the loan over an agreed period of time.
- The rentals are fixed for the term of the contract, typically 3 to 5 years.
- Ownership of the equipment remains with the Lessor.
- The lease rentals are fully deductible as an operating cost.
Is a Lease tax efficient?
- 100% of the rental is offset as a business expense.
- The Lessor will claim capital allowances.
- This tax benefit is passed to you through lower rentals.
Why is a Lease cash flow friendly?
- The rentals are spread over the useful life of the equipment.
- The equipment is generating the cash to finance the rentals.
- There is no deposit to pay, so you do not need up front capital, which improves cash flow.
- VAT is charged on each rental, not on the purchase cost.
- A lease helps preserve your cash reserves, which will earn more interest.
Does Leasing affect existing credit lines?
- No. Leasing the equipment, allows you to retain your credit line with your bank.
- By Leasing you open up new credit lines with other funders.
- This offers the flexibility to have the use of equipment when you need it.
- You can do so without in any way affecting your current banking arrangements.
- Borrowing to purchase equipment can reduce business flexibility.
- Which may prove critical if you are planning business expansion, a new marketing campaign or need to recruit more people.
Is Leasing more expensive?
- This depends. Lease rates can be more expensive, as they reflect finance costs.
- Accounting and tax issues, mentioned above, have to be considered.
- The advantages of Leasing outweigh the possible difference in the interest rates.