What’s more valuable to you, control or flexibility? When deciding whether to lease or buy equipment for your business, having this question in mind can help you understand the impact to your business better.

Learn more about the pros and cons of leasing versus buying business equipment in this article and discover which one might be right for you. Find out:

  • What are ‘assets’ and ‘liabilities’?
  • How your business is impacted when buying versus leasing
  • How are sole traders affected versus limited companies?
  • How can I decide when I should lease or buy
  • Understand your cash flow better with Countingup

Leasing or buying equipment has very different implications for sole traders versus limited companies. Learn more about how it can help or hinder your business’s circumstances and how to detect the signs to protect yourself.

What are ‘assets’ and ‘liabilities’?

Knowing the difference between ‘asset’ versus ‘liability’ is critical to understand how leasing and buying operate in business contexts. Each method of securing equipment has fundamental differences in how it impacts your business’ balance sheet and financial flexibility into the future. 

Generally speaking, assets are things your business owns, while liabilities are things your business is vulnerable to. Buying doesn’t always reduce your liabilities and leasing doesn’t always reduce your risk. Find out why below. 

How your business is impacted when buying versus leasing

Buying

Buying equipment provides your business with an asset (whatever you’ve bought). 

Buying equipment for your business can be very expensive. You have to pay in full every time to own each item without any liability. Unfortunately, this can be unrealistic if your needed total is very large. Instead, if you buy assets with a credit card or loan, your business gains both an asset and a liability – your purchase plus the need to meet debt payments on it over time. 

Beyond using your equipment for what it’s meant for, your new asset can also be used in other ways. For example, some assets appreciate in value, meaning they get more expensive over time (like property). In this case, you can see whether you can make money selling it at a later date and maybe make a profit from what you’ve bought. However, most goods depreciate in value, meaning they get less expensive over time (like cars and laptops). In this case, you can claim capital allowances on your taxes to help cover your losses.

And so, buying goods gives you more options but technically more risk depending on what you buy and how.

Leasing

Leasing equipment works much like renting a car or house. You can use whatever you’ve bought, but you can’t sell it. And so, all you’re paying for is to use your equipment, rather than making more meaningful payments to own it (like buying offers you).

This can give your business more flexibility as, if a new piece of technology comes along that’s better, you can come to the end of your leasing agreement and switch over to a new lease. However, some leasing agreements (typically on things like cars) place usage restrictions on what you’re paying for. This is to help minimise the depreciation over time which can be restrictive on your business’ growth. For example, if you need to drive or use a leased piece of equipment more as you get busier, you may find upgrading your agreement to suit your new needs is very expensive.

Despite this flexibility, leasing still comes with liability. Specifically, leasing agreements work similarly to debt. Here, your business is still faced with an ongoing commitment to pay something (like a credit or loan arrangement) but without the benefit of being able to sell and settle the total whenever you’d like. Given this, is leasing worth it to you?

How are sole traders affected versus limited companies?

As sole traders’ personal and business finances are more closely related, you may wish to be particularly wary of buying goods on credit and loans, or long-term leasing agreements. If your business struggles for a period, you’re still obligated to meet these payments even if your profits are low and payments need to come from your personal finances. 

While limited companies also face these cash flow pressures in having to meet their financial obligations during quieter spells, there is much less risk from a personal finance point of view for company directors.

To help avoid this, you should pay close attention to your business’ cash flow and profitability, and how these financial indicators change with new marketing strategies over time.

How can I decide when I should lease or buy?

Deciding whether to lease or buy equipment may depend more on what you’re buying rather than an approach for your whole business. For this reason, a mixed approach of leasing and buying may be more suitable.

This way, you’ll enjoy the benefits of owning assets that appreciate over time, control over your usage on others that depreciate, and avoid the risk from goods or equipment that depreciate the fastest – choosing to lease instead.

Learn more about managing your purchases and expenses in our guides How to finance a business purchase and How to budget for starting a business.

Understand your cash flow better with Countingup

Whether you’re managing leasing or loan agreements, knowing how your finances are impacted as your business grows is crucial. Thousands of business owners are using the Countingup app to save time on their financial admin and focus on growing their business. 

Countingup is the business current account and accounting software in one app. It automates time-consuming bookkeeping admin for self-employed people across the UK and provides real-time insight into your business’ financial performance. This way, you can enjoy a better understanding of your trading and focus on chasing the opportunities best for your profits and expense obligations so you’re always covered.

The app comes with automatic expense categorisation, receipt capture tools and invoicing features so you can confidently keep on top of your business finances and save yourself hours of accounting admin.

Gain better insight and confidence in your business. Find out more here and sign up for free today.

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