When I’m talking to business directors, that is the most common response when I say, “What about leasing your software/equipment/machinery instead of buying it?”
People think leasing is for companies who don’t have the capital to purchase outright.
I want to address this misconception about asset finance here, because it prompts so many businesses to make costly buying mistakes that affect long-term growth.
Let me clear the air:
Choosing to lease has nothing to do with your ability to pay up front – it relates to how you use your business’ most valuable asset: cash
Having enough cash in the business to make an outright purchase certainly means you’re in a strong position.
But working capital is a valuable asset, and there are myriad ways to spend it. The question you need to ask yourself is: “Are there other more effective ways to spend this money?”
If the answer is “yes”, then you’re taking a risk by tying up your working capital in software and equipment. You’re limiting opportunities to recruit staff, offer training, advertise, travel to sales meetings, manage inventory and more. In other words, you’re potentially limiting your business’ growth potential.
Leasing enables you to invest in the business and manage cash flow easily
When you lease, you keep the working capital in the business. You have regular, fixed payments so you can easily manage cash flow and forecast. And your business benefits from the equipment immediately – which means it’s paying for itself with the value (in output, productivity, service) it’s adding.
You’re free of this feast-and-famine approach to financial management, where you’re saving up and having to wait to before the business starts seeing the benefits.
Think about the compromises you’re making
I was talking to a restaurant owner recently. The kitchen needed a new dishwasher, and he had a budget based on available capital.
He knew the model he was considering would last 18-24 months based on the level of usage, and that repairs would be necessary during that period.
We did some maths.
If he leased a dishwasher that was more expensive but faster and more robust, he’d pay less over a 5-year period than he would by buying a cheaper model and dealing with downtime and repairs. His kitchen would be more productive, his staff would be happier and he’d save money overall. He could then use that money to invest in other kitchen equipment.
Just because you can purchase outright doesn’t mean you should
That’s the lesson here.
Take a holistic view of your requirements in the short and medium term. Consider the equipment, system or software that’s best for the business (as opposed to best for your current bank balance). And look at the asset finance options available to you.
Why not make the most informed decision before tying up valuable capital?
- Just because you have the capital to invest doesn’t mean you should pay up front – cash is a valuable asset
- When you lease, you start using the equipment or software immediately, so the investment pays for itself without the capital outlay
- Would the business be better off with a better model? Leasing gives you the flexibility to choose the best solution because you don’t have the same affordability restrictions