Paying by Cash vs Leasing

Whether you are a sole trader, a PLC or a government dept., cash flow is the lifeblood of business. When it comes to spending large chunks of it on IT equipment, sooner or later the same question will come up; is it better to buy the equipment outright or to lease it? Below we will try to show you that from a cash flow point of view leasing has considerable advantages to your cash flow.

An up and coming sales company has decided that it needs to update its aging servers. They have decided that the network upgrade will cost a total of £11,750 inc VAT, they have also decided that they expect to expand further within in the next 3 years to ensure that they don’t fall behind the technology stakes again, the following two scenarios show the financial benefits of leasing vs. buying.

Scenario 1 – Buying outright

Our company buys the new servers for a total of £10,000 + VAT, Immediately they are £11,175 down but as they are VAT registered they can claim the VAT back at the end of the current quarter in 3 months time.

And that’s it, your money is tied up in the new equipment, so if you had other plans for the £10k then you’re going have to get it from elsewhere. Over the next three years our company can claim back 25% of the balance per year.

Initial Purchase Price £10,000

Year 1
25% of £10,000 = £2500 – Balance = £7,500

Year 2
25% of £7,500 = £1875 – Balance = £5,625

Year 3
25% of £5,625 = £1,406 – Balance = £4,219

So at the end of the servers expected working life our company has been able to claim £5,781 against pre tax profits.

Scenario 2 – Lease Rental

Our company leases the servers over a 3 year period paying 1 initial payment of £343 + VAT, then 35 monthly payments of £343 + VAT. So out of their original £10,000 + VAT budget they still have £9657 to spend on stock which they can sell for a profit, something that could not have been done if they had bought the equipment outright. This really is a case of having your cake and eating it.

But there’s more. Not only does our company retain the money to spend on more stock, but the payments they make on the lease are 100% tax allowable against pre-tax profits. As shown below:

Year 1
100% of £4,116 (12 x £343)

Year 2
100% of £4,116 (12 x £343)

Year 3
100% of £4,116 (12 x £343)

Total that can be claimed back against pre tax profits is £12,348.

Even though the lease rental has a higher cost of £2,348 + the £10,000 over the 3 years, the ability to claim all of this back compared to the £5,781 for the outright purchase shows the tax benefits of leasing.

Conclusion

Why ‘make do’ with equipment that ‘won’t do’? Our leasing solution can give you the tools you need and not what your bank account dictates to you.

So leave your overdraft intact and take the pressure off. After all, today’s cutting edge equipment will be tomorrow’s ‘old hat’. It’s the flexible that prosper, not the companies that hang on to old, outdated equipment. As any financial advisor will tell you, investing large sums in fast depreciating assets is not a wise move.