Business Library

Businesses - Paying For Your Equipment

Before purchasing new equipment for your business - whether it's a new computer system, upgrade of an existing computer system, new software, a photocopier, telephone system, new office furniture, vehicle, plant and machinery or anything else - you need to carefully consider the options available to pay for it.

After all, it's crucial that you acquire the correct equipment for your business, and no business owner would commit to buying equipment without first spending time to research all the options and benefits to acquiring the asset. Yet many people in business pay for their equipment without the same consideration.

1. Paying Cash

This is the option most companies who are in a cash rich position will consider. You have the advantage that you own the equipment and don't have to worry about making payments to a finance company, helping keep your monthly running costs down.

However, you are often as not investing in a rapidly depreciating asset that will be obsolete - in the case of computers almost as soon as it is installed. A frightening thought. In most cases you will have to replace or upgrade it in a few short years only to find that it is worth a fraction of it's value! And have you fully considered the tax implications to your business? We'll talk about this in detail a little later.

Of course you should also consider other uses for your capital before tying it up in equipment:

Can it be used to buy stock in bulk therefore saving you money?
Could it be more profitably spent on advertising or marketing helping you attract more new customers?
What about investing the money in the stock market or even in your banks high interest account? This may bring a greater return than leasing your equipment will cost.
You could use your cash to take on more staff or expand your business in some other way helping you make more money.
You could use your cash to settle or part pay any loans you or the business may have outstanding saving you money.

2. Bank Financing

Bank Loans - there are normally two kinds, term loan or overdraft. Let's look at each separately.

Term Loan: This is where you borrow an agreed amount for a specific item of equipment. Repayments include capital and interest for an agreed term.
Overdraft: The cost of your new equipment can be added to an existing facility or a new one taken out to cover the cost, enabling you to write a cheque to your supplier for payment. You repay only the interest on a quarterly or monthly basis and repay the capital at some time in the future. Overdrafts are in many cases repayable on demand by the bank (at any time to suit them not you), and can be reviewed by your Bank Manager and reduced or even withdrawn with little or no notice. Overdrafts are also subject to varying rates of interest and review charges often making them more expensive than you first thought.

A few closing thoughts on bank lending worth considering:

If you have other loans for your business already in place, check for any personal guarantees you may have signed. These can often be used to guarantee future loans without you knowing.

Check what set up and review charges you will have to pay; banks often only quote an interest rate and don't mention these charges until it's too late.

Remember you could be using up a valuable source of credit for your business when you could get funding elsewhere.

The bank may in future request more and more accounting information, reports and meetings (where you may have to pay for the Bank Managers time) on how your business is performing. This can be time consuming for you and can make you feel that you are working for them not yourself.

Please remember that the bank have access to the funds in your account at any time so please be careful here. If you insist on a bank loan we recommend a term loan.

Find out more about Commercial Loans or request a no-obligation quote today.

Leasing and Lease Purchase

Here you make payments to a finance company, who buy the equipment direct from your supplier, on your behalf, for an agreed term anywhere between one and five years. This can be longer for telecomms equipment.

In this case you do not own the equipment (the finance company own it) but it has the major advantage of being 100% tax allowable. This means that your payments to the leasing company are completely written off your taxable profit for the year, saving the business between 20% and 40% of the cost of the lease depending on the rate of tax paid.

The payments are fixed for the term making it easy for you to plan ahead with no unpleasant surprises if interest rates go up.

You can include hardware, software, maintenance and training in one monthly or quarterly payment over your requested term. In most cases you pay nothing until the equipment is fully installed and it is easy to upgrade or change the equipment as needs change in the future.

There is no strain on your existing credit facilities as you are gaining funding from an outside source. Also, as you are technically renting the equipment, it's off your balance sheet as an outstanding liability.

The downside is that you don't actually own the equipment, but as you have full use of it and you will probably want to change it in a few years is this really a problem? If you need some comfort here many finance companies will agree to sell you the equipment for a nominal fee upon completion of the term which means you can still own it at the end (but check this point before signing).3. Leasing and Lease Purchase

Lease Purchase or Hire Purchase

This is basically the same as a term loan from the bank but from a finance company avoids going to the bank but without the flexibility and tax advantages of lease rental.

Read our Buying Guide for more help, or request a quote now!.

This article is intended as a guide, and is provided by Technology Leasing. You may also find it helpful to talk directly to a professional in Finance Provision. E&OE.