Lease or Buy Business Equipment

The franchise business you want to start may require a specialised plant and machinery. Your research into your chosen franchise business will give you details of the equipment you will need.

This can be anything from printing machines to digital IT equipment to help you operate your franchise profitably.

Business related machines and equipment can either be purchased outright, or leased. Leasing the equipment or machines you need could be much more economic as this could free money to spend on other aspects of your franchise.

Buying equipment

Equipment, machines and a wide-range of digital devices that can help you run your business can all be bought outright. The amount of money you have available will determine if you can afford to buy new equipment, machines and the digital devices you’ll need, or if you have to look at the used market for these purchases.

Buying equipment or machines has a number of advantages that include:

• 1: You are the owner of the equipment or machines. As no lease agreement exists the devices can’t be repossessed.
• 2: If you buy your machines or equipment outright, you won’t be charged any interest as in a credit agreement for hire purchase for instance.
• 3: You can later resell the machines or equipment and recoup a percentage of their purchase price.

Buying equipment and machines has a number of disadvantages that include:

• 1: Interest will usually be charged for any machines or equipment (especially digital devices such as computers) that you buy via hire purchase agreements.
• 2: Usually you have to pay cash for your equipment or machines. This lump sum could be used elsewhere in your business.
• 3: You are responsible for the maintenance of the equipment or machines. Also, you don’t have any upgrade option as with some lease agreements.

Leasing equipment

Business leasing has been available for decades and can be a useful alternative to buying equipment and machines - especially digital equipment that quickly becomes obsolete.

Leasing agreements can be complex documents, so always seek legal advice if you are unsure of any of the details.

There are three basic types of equipment leasing agreement you could use:

• Contract hire
  This type of equipment leasing is usually used for businesses that need vehicles. This type of equipment leasing can be complex due to the tax implications with motor vehicles. Take advice before signing any lease agreement.
• Finance leasing
  This is the most common form of lease agreement. Any equipment or machines including digital devices can be leased with this kind of agreement. Usually spanning three or more years, your business is responsible for the maintenance and insurance of the equipment or machines. These items must be shown on your franchise’s balance sheet as a capital item.
• Operating leasing
  Often, your franchise may not need a piece of equipment or a machine for a long period of time. Buying equipment or machines that will not be used continuously isn’t a very efficient use of your franchise’s cash. Operating leasing is ideal as you don’t have to show the item as a capital item on your balance sheet, the leasing company maintains the equipment or machines and takes it back at the end of the short lease.

Leasing equipment or machines has a number of advantages that include:

• 1: Most leases especially for digital equipment or machines enables you to update your devices at the end of the lease. That way your franchise business is always using the latest equipment.
• 2: Equipment leasing can give you the option of buying the machines or devices at an advantageous rate at the end of the lease agreement.

3: Leasing payments enable you to plan your franchise’s cashflow as the lease payments are fixed amounts payable at the same time each month, or each quarter.

Leasing equipment or machines has a number of disadvantages that include:

• 1: Equipment leasing for your business is generally more expensive than purchasing the equipment or machines outright.
• 2: Look closely at the VAT and tax implications of leasing equipment and machines. Your accountant can give you more detailed advice.
• 3: You never actually own the equipment or machines (unless you buy them at the end of the lease agreement) so you never have the equipment or machines as an asset within your franchise business.

Tax and depreciation

Business leasing and outright purchase of machines and equipment has a number of tax implications. Capital allowances enable your franchise business to offset the value of an asset you lease or buy against the taxable profits of your business. You can find out more about taxation and leasing on the HMRC website: www.hmrc.gov.uk/budget2006/bn14.htm.