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Should you buy or lease your business assets?
There are certain items of equipment, machinery and hardware that are essential to the operation of your business – whether it’s the delivery van you use to run your home-delivery food service, or the high-end digital printer you use to run your print business.
But when a critical business asset is required, should you buy this item outright, or should you lease the item and pay for it in handy monthly instalments?
To buy or to lease? That is the question
Buying new pieces of business equipment, plant, machinery or vehicles can be an expensive investment. So, depending on your financial situation, it’s important to weigh up the pros and cons of buying, or opting for a leasing option.
First of all, let’s look at why you might decide to buy the item…
Buying: the pros and cons:
- Pro: It’s a tangible asset – when you buy an item, you own the item outright and it will appear on your balance sheet as one your business assets. As such, by owning these assets outright you increase the perceived capital and value of your business. You can also claim the cost of the asset against your capital allowance for tax purposes.
- Pro: It’s yours for the life of the asset – once you own the item, you have full use of the equipment for the duration of the life of the asset. Your use of the asset isn’t reliant on you being able to keep up regular lease payments, and if your financial circumstances change then you can sell the asset to free up the capital.
- Con: It’s an expensive outlay – paying for the item up-front is a large outlay for the business and will require you having the cash to cover this cost. Spending a large lump sum in this way may take cash away from other areas of the business, so you need to be 100% sure that this purchase is the right decision and a sound investment.
- Con: You may require extra funding – if you don’t have the liquid cash available to buy the item outright, you may need to take out a loan. Asset finance is available from funding providers, but does tie you into a loan agreement that will add to your liabilities as a business – reducing your worth on the balance sheet.
Leasing: the pros and cons:
- Pro: Leasing has a cheaper entry point – if the item you need to purchase has a large price tag, leasing allows you to make use of the asset without the cost of buying it in full. For startups and smaller businesses with minimal capital behind them, this can make leasing a very attractive option. You may not own the asset, but you can make use of it – and this may be the difference between the success or failure of your business.
- Pro: You can spread the cost – there is still an associated cost of leasing, but you can spread the cost over a longer period, making it easier to find the necessary liquid cash to meet your lease payments. With this money saved, you can then invest in other areas of the business, helping you to expand, grow and bring in more customers and revenue.
- Con: You don’t own the asset – there are different types of leasing agreement. Under a capital lease, you do own the asset (once you’ve paid if off). But if you opt for an operating lease, this is a more short-term lease and you won’t own the asset at the end of the contract. Ownership does have its advantages (including being able to sell off the asset if required) so it’s important to consider what kind of leasing agreement you’re entering into and what the advantages/disadvantages may be.
- Con: You may pay more in the long run – most leasing agreements will attract additional costs and interest on your agreement, so you may well end up paying more than the market price for your asset in the long term. If you can cope with the higher cost, this is fine, but bear in mind that buying outright may have offered greater value.
- Con: You may lose the use of the asset – if you can’t keep up your lease payments (due to poor cashflow for example) then the owner of the lease agreement may recall the asset. If this item is crucial to your business model, losing this key asset can have a profound impact on your ability to operate. In this respect, leasing is a more risky prospect, but also an easier option for businesses with less cash to splash.
Talk to us about whether buying or leasing is the best way forward
Whether you opt to buy or lease your equipment isn’t always a straightforward decision to make – so it’s a good idea to consult with your accountant early on in the decision-making process.
We’ll help you review your current financial position, assess your available cashflow and look at your regular cost base to decide whether buying or leasing is the right thing for the business.
Let us help you
Establishing your competitive advantage
Why do customers buy from you? Knowing what it is that makes someone choose your products and/or service over your closest competitor is critical business information.
Understanding this ‘competitive advantage’ is an important part of making your business stand out in the marketplace. Establishing your competitive advantage will help you create a compelling marketing message and will build value in your business – and this can all be wrapped up in your brand messaging, marketing and sales activity.
But how do you define what your key advantages are?
Key ways to understand your competitive advantage
Your competitive advantage could be something tangible, like a unique feature that your competitors simply don’t have. But, equally, it doesn’t have to be a feature at all – it might be your brand positioning or your customer service that sets you apart.
To drill down into the fundamental elements of your competitiveness, you need to ask some important questions about the nature of your products/services, so you know precisely why your brand appeals to your core customer base.
For example, ask yourself:
- Were you first into the market? – If you’ve been a true innovator in your sector, you may have been the very first company into your current market. Whether that’s a new kind of software app, or a unique piece of farming equipment, you need to protect this position and ensure you stay the dominant player in your new niche.
- Could your product/service be copied? – If you hold a unique position in your market, it’s crucial that your product/service can’t be copied and rolled out to undermine your position. As such, you need to protect your intellectual property (IP) and file patents and copyrights for all the relevant IP that gives you your competitive advantage.
- Are you niche specialists? – Your competitive advantage may be that you offer a truly niche specialism, where there aren’t many competitors in this particular market. To protect this dominance, it’s important to maintain your high-quality service, to work closely with your customers and to remain at the cutting edge of the specialism.
- Can you differentiate your product/service? – Does your product stand out from other similar products offered by your competitors? The more unique you can make your offering, the more likely it is that your brand will be the one that people turn to. You can differentiate by features, price, customer service etc. to make sure you’re the stand-out option for customers in this market.
- Do you offer greater value? – Any transaction aims to bring value to your end customer. But are you able to deliver a better service or offer more value than your competitors? This may mean offering added value that can’t be matched by other companies; for example, your brand being more local, more sustainably sourced, faster to be delivered, or coming with better customer support.
- Do you offer a better price point? – Price can be a real differentiator, so you need to constantly be aware of how your prices compare to those of your competitors. Is your product cheaper than others? Or are you pitching your price at the top end of the market? The more competitive your price point is, and the more it’s linked to your unique value, the easier it will be to carve out a competitive advantage.
- Is there stable demand for your product/service? – do people need your specific product and what’s the size of the demand? Do you have a strong network amongst your customer base, or is a competitor gradually winning market share and undermining your supremacy as the market leader? This needs to be regularly reviewed and assessed.
- Is your product/service easy to buy? – The way you distribute your product or service can have a big impact on your market position. How quickly and efficiently can you deliver your offering to your customer? And do you have exclusive rights to a distribution channel that makes it easier for your customers to buy from you?
- Does your brand have wider appeal? Do your customers identify with your brand in a profound way, and do you have ‘fanboys/fangirls’ who are advocates for your products? It could be that your company philosophy, your values and the way you interact with your customers all offer something unique that draws in customers and makes them stick with your brand – and, if so, there’s a need to measure and retain this brand value.
Talk to us about defining your competitive advantage