When looking to purchase new equipment for your organisation, there are a variety of different ways to go about paying for your hardware and solutions — there's rental finance, hire purchase/rent to own, and outright capital purchase. So what do you need to consider when deciding what's right for you and your organisation?
An outright capital purchase is a simple transaction, as you will be paying in full for all the equipment and the required service for installation upfront. However, for a variety of reasons, an organisation may opt to purchase hardware by means of rental over a traditional outright purchase — and here's why.
Pros
- No capital outlay or deposits are required.
- Supplier good standing with rental finance institutions ensures obligations to provide customer support and service are met.
- The customer may opt for different durations and escalations to best suit their situation and financial forecasting.
- Flexibility to decide whether you'd like more premium hardware and services you may otherwise not be able to afford.
- Financial management: knowing your budget, term and escalation allows foresight to prepare, allocate and manage your funds.
- It may improve 'Equity Ratio', 'Current Ratio' and 'Return on Assets Ratio' on a financial ratio analysis of a business.
- Writing it off as an operating expense — if the solution generates financial wealth significantly higher than the cost of owning and running it, it can be written off under Opex and kept under assets.
- A business can usually deduct the full cost of lease rentals from taxable income.
- If you haven't purchased the asset outright, you won't have to worry about any overdraft or other loan taken out to finance the purchase being withdrawn at short notice, forcing early repayment.
- The leasing company carries the risk if the equipment breaks down.
- If you need to upgrade or replace equipment, you can simply make a small adjustment to your regular payment rather than invest a lump sum upfront.
- Installation and software can be included (finance house dependent).
Cons
- With interest payments included, the cash outflow is higher than in the case of an outright purchase.
- Your organisation may be locked into inflexible medium or long-term agreements, which may be difficult to terminate.
- Leasing agreements can be more complex to manage than buying outright and may add to your administration.
- When you lease an asset, you don't own it outright until the end of the lease period, when you may be allowed to purchase it.
- Evergreen contracts automatically renew after the initial term expires, until one of the parties gives three months' written notice.
Rental gives organisations the opportunity to obtain the required equipment without having to outlay a lump sum upfront, or worry about servicing such devices if your rental agreement covers servicing for you. Should you feel your organisation will benefit from an outright purchase, then the choice is yours.
Utilising these points in your decision-making process will assist you in making the right decision for your organisation, and in moving forward with the financial solution.
Please note, these notes should not be seen as giving any financial advice.