Lease versus purchase calculator

The outright purchase of a fixed asset is only an option if you have sufficient funds available to you, otherwise you will need to look at some form of lease or hire purchase. Banks can often negotiate a lower purchase cost for their leased assets than you could obtain yourself. Use our calculator to see what’s best for you.

Outright purchase

The outright purchase of a fixed asset is only an option if you have sufficient funds available to you, otherwise you will need to look at some form of lease. Under hire purchase, the business will own the asset once all of the payments have been made. You will also be able to claim capital allowances from the start.

If your business has spare cash sitting in a deposit account, then buying the asset will probably be your best option as you will almost certainly pay less overall than you would through a lease or hire purchase agreement. But always prepare a cash flow forecast to make sure you will still have enough money to run the business.

However, business loan interest rates aren’t so favourable at the moment, so if you are looking to use an overdraft or loan to fund the purchase, it will significantly add to the cost. You also need to consider that overdrafts can be withdrawn at very short notice and in some cases early repayment of loans can be demanded.

Work out the lifetime cost of purchasing an asset outright and compare this with the cost of leasing - don’t forget to take into account the cost of capital with our Lease Versus Purchase Calculator.

Leasing

With a lease, the bank (or finance company) buys the asset and you refund them over time, plus interest. These smaller payments will leave your business with more cash, but because you pay interest on the instalments, you will usually pay more for the goods in the long run. Depending on the lease agreement, your company might never own the asset. This means that you can’t claim capital allowances on the leased assets unless the lease period is for more than five years (or in some cases more than seven years). However, the lease payments should be tax deductible.

Leasing is clearly better for smoothing cash flow. What else could make a difference?

• if you’re a small business, you might not get the same deals on price as a large bank. Ask the bank what price they can get the asset for
• ask for the flexibility to upgrade the equipment during the lease, especially for high tech equipment
• if the future of the business is uncertain, then lease assets over a shorter period to avoid getting locked into long-term agreements
• ensure the lease agreement is clear on what happens at the end of the period. For example, do you have to return the equipment or can you extend into a secondary period for a lower sum.

Work out cost of leasing with our lease versus purchase calculator.