The current operating environment has created a number of challenges for many individuals and businesses. Whether you are still feeling the impacts of the COVID-19 pandemic or the cost-of-living crisis, cash is king, and your finances should be managed prudently. However, the reality of the situation has not restricted businesses from seeking opportunities to stand out and be innovative, nor has it prevented kiwis from looking at potential technology and vehicle upgrades. Whether to buy or rent, or cash up front or fund through a loan are typical questions facing many in these situations. Below explores these situations
Paying cash up front may appeal to some who are averse to a certain level of debt but is not necessarily the best utilisation of your own funds. As a general rule of thumb, any cash outflow should be matched against any income derived from the acquired asset to assist with future cash flow. A finance lease also referred to as a hire purchase, is a mechanism that allows you to purchase an asset by paying for it over installments rather than upfront. Once the obligations of the agreement have been met, ownership of the asset is then transferred to the purchaser.
On face value, this seems to be a valuable option to consider, you immediately gain all the benefits and values which the asset provides, given your payments are spread over time. However, based on the negotiated repayment terms, at the end of the agreement, you have likely paid more than what the asset is worth at the time of acquisition, considering the interest and any additional maintenance costs required during the asset’s life.
If this option appeals to you, it would be worth shopping around to explore various options such as bank asset finance, hire purchases provided by a dedicated financing company, or vendor finance. All these options have their pros and cons, but it is worth exploring to obtain the best finance option suited to your needs.
Another form of acquiring the use of an asset is through an operating lease or rental. This varies from a finance lease because rather than purchasing an asset via an agreement, you are simply entering into a contract to rent an asset for a fixed period of time.
Operating leases are often viewed as a cheaper alternative to buying an asset if you are only intending to use an asset for a short period of time or, given the advancement of technology in today’s society, where assets like machinery, computers, and cars are constantly becoming obsolete. Rather than constantly buying and selling these assets at large variances, businesses will tend to lease such assets given it’s more affordable, cost-efficient, and that you do not need to deal with disposing of the asset at the end of its useful life. For example, if you are in the courier sector, constantly traveling throughout the country to deliver goods, consider the mileage your vehicle would be ramping up. Logically thinking, is spending $75K on a van and knowing you will sell it at a big loss a wise business decision?
Things to Consider
There is a considerable amount of planning required and factors to consider before entering into any financial agreement. The last thing you want is to commit yourself into an agreement where you are unable to fulfil your obligations and force further action to be taken against yourself. We recommend considering the following;
- Why am I entering the agreement?
- What benefits will the asset provide?
- Are the benefits received reflected within the short or long term?
- Is there an alternative within the market?
- Are the repayment terms fair and reasonable?
- Do I have the ability to meet these obligations? This may require further forecasting and budget analysis.
If you require further information as to which options suits you and your business, feel free to reach out to the team at Bellingham Wallace or your trusted advisor.
Author – Rupesh Laxman