Money is a limiting factor for most new businesses, start-ups. And often in both these cases, the capital outlay on office space, storage of inventory (‘godown’ space), office equipment and fittings, IT infrastructure, etc add up to massive figures. Many first-time entrepreneurs get discouraged at this level when they see such huge amounts of fixed expenses in their business plan.
So what is the way out? What if you don’t have the money or better still, don’t want to block your capital on these expenses? Is there an option? Yes, you could lease instead of buying!!! In this article, we talk about the pros and cons of a buying vs leasing option.
Buying — Pros and Cons:
• Buying will give you ownership and it makes business sense to buy when the property has a long useful life and is not likely to become technologically outdated in the near future
• The Income Tax Act also allows for the deduction of the cost of assets purchased over stipulated years • And then of course, there are tax savings for almost any business equipment through depreciation.
• However, for some business owners, purchasing a business asset may not be an option because the initial cash outlay is too high. • If you purchase high-tech equipment, you run the risk of technological obsolescence, and you may be forced to reinvest in new equipment long before you had planned to.
Leasing — Pros and Cons:
• The primary advantage of leasing business asset is that it allows you to acquire it with minimal initial expenditure • Lease payments can usually be deducted as business expenses in your P&L Account, thereby reducing the net cost of your lease. • Leases are usually easier to obtain and have more flexible terms than loans for buying assets
• It also allows businesses to address the problem of obsolescence • , However, leasing an item is almost always more expensive than purchasing it for the interest component involved in it.
• Also, often early termination of lease involves big penalties
How to decide whether to buy or lease?
Answering these basic questions can help in deciding which is more prudent:
• What is the approximate net cost of the asset after factoring in tax benefits and resale value?
• What is the financing option under both the scenarios – buying and leasing?
• What is the expected useful life of the asset? How long do you plan to use it?
• Will you need new asset or can a used one be just as good?
• How often does technology change with this asset? Buying or leasing will differ with every type of asset. While leasing for IT infrastructure is advisable owing to the fact that technology changes are often frequent, buying your own property for housing your business may be a good idea if you have the cash.
Once again, judge every asset purchase or lease by its feasibility both in monetary and non-monetary terms. You will then realize that cracking the ‘buying vs leasing’ code is not so difficult to crack!!!