Many companies make incorrect and costly decisions through not conducting a proper lease v buy analysis at the start of the project. In addition, businesses can leak profit by not considering leasing alternatives at commencement (i.e. obtaining competing offers) and continuing to pay for leases beyond the end of the lease term.
The decision to buy or lease assets depends on many factors such as urgency and duration of operational need; nature and specification of the item(s) in question; availability of funding for a purchase; the impact on debt, gearing and bank covenants; the stage of the business cycle; present value of cash flows from the asset(s); and finally tax.
The larger the asset, the more complex the decision-making process can be. Expanding physical capacity (new buildings) is a major decision requiring careful thought and consideration of funding availability, the performance of the business, the economic climate and tax.
Foreseen changes to accounting rules will require many leases to be included on the balance sheet as assets and liabilities. This will affect bank covenant and other financial ratios but will remove one of the reasons for leasing of assets instead of buying (i.e. to keep assets “off balance sheet”).
However, lease v buy analysis will continue to play an important role in capital planning, tax and cash flow management.
Meridian can help by:
- Evaluating the capital needs of the business
- Performing lease v buy analysis, having regard to the tax position of the business and tax effect (e.g. tax allowances) of the investment under each scenario
- Looking at different lease structures to best suit the operational and financial needs of the business, including affordability and end of lease options
- Assessing the impact of each scenario on financial ratios, bank covenants etc.
- Introducing competition and considering the relative underlying / true cost of alternative lease offers