In order to operate and grow, your commercial customers need to acquire assets, but they also need to maintain a healthy level of working capital. This creates a financial and strategic dilemma, but it’s a dilemma that you can help them overcome by offering them the option to pay for assets via finance.

In this article we take a closer look at the cash vs leasing debate, the pros and cons of both options, and the reasons why your customers would choose to pay via finance rather than with cash.

Cash vs Leasing: The Pros and Cons

Buying an asset outright with cash

If it is important that the business owns the asset(s) and they have the capital available, buying an asset outright can be a sensible decision, particularly if the assets are going to retain or appreciate in value. Having said that, buying assets with cash carries both advantages and disadvantages which businesses should be aware of.

Advantages of buying assets with cash

• Customers will own the asset fully
• Customers can claim capital allowances on the asset
• Customers avoid entering a financial agreement that may be difficult to terminate

Disadvantages of buying assets with cash

• Customers have to pay the full cost of the asset upfront which can cause a dent in its cashflow.
• Their choice of assets may be influenced by restricted cash flow, i.e., they may buy what you can afford, not what they need.
• Customers may have to take out a loan or overdraft to fund the purchase, and in some cases early repayment of the loan could be demanded at short notice.
• Customers will be responsible for the maintenance, repair or replacement of the assets.
• The value of the asset may depreciate over time meaning it will be worth less than what they paid for it.
• They will not be able to take advantage of the tax benefits of deducting the leasing costs from taxable income.

Leasing assets

Leasing enables your customers to use assets for a fixed period of time in return for regular fixed payments. In some cases leasing enables businesses to acquire assets that they would not be able to afford if they had to pay in full upfront, but that is not the only reason why businesses choose to lease assets.

Advantages of leasing assets

• They don’t have to pay for the full cost of the asset and so can retain cash in the business.
• Customers may be able to access a higher quality of asset than they could if buying outright.
• The regular payments are easy to budget for, and as rates are fixed, there will be no surprise costs to cover.
• In many cases the costs of the assets are fully tax deductible, and sometimes capital allowances can also be claimed on the assets.
• In the case of operating leases, they are not responsible for the maintenance of the assets
• The leasing company carries the risk of the assets breaking down or malfunctioning.
• It is sometimes possible to upgrade the assets during the lease by making a small change to the regular payment rather than having to pay a large lump sum.

Disadvantages of leasing assets

• A deposit or some payments in advance may be necessary.
• As leasing agreements will include interest, they may end up paying more for the asset than they have had you bought it outright.
• They will not own the asset, although some agreements will give them the option to purchase at the end for a fee.
• They will be committing to making the payments for the term of the lease.
• They will need to ensure that they fully understand the terms of lease, including any end of lease obligations or payments.

The main point to take away here is that there is no right or wrong way to fund a business’ operation and growth, but many no businesses should dismiss the option of leasing assets before they have weighed all their options, and certainly not before they have done the maths.

But, surely only cash-poor businesses use finance? Nope.

There is a misconception that the only businesses that would choose to lease are those that cannot afford to pay in cash. Some businesses might even avoid offering the customers to option to pay via finance as they do not want to risk causing ‘offence’ by suggesting they might be low on cash.

A possible consequence of this, unfortunately, is that businesses part with their cash unnecessarily, causing themselves cashflow problems that prevent them from being able to invest in further growth and often missing out on tax savings. This point of view is made even more ironic when you consider that many of the world’s most successful, cash-rich businesses opt to lease assets and use leasing regularly in their financial strategy.

By leasing the assets that their business needs to operate and grow, customers will spread the cost over time via fixed regular payments and keep cash in the bank. At the very least, this gives them breathing space and flexibility, so they can put their mind – and cash – to the task of building their business’ future.

What’s in it for you?

Your customers want flexible payment options, and you can satisfy this need by proactively offering finance. By doing so, you could unlock significant benefits for your business including:

• Overcome customer cost objections, as £300 per month sounds much more appealing than £10,000 upfront.
• Increased order values, as customers typically spend 30% more when they lease compared to using capital.
• Protect margins, as customers lose sensitivity to unit costs when presented with a total cost per month.
• Retain customers as leasing makes renewals much easier than when dealing in cash transactions.
• Differentiate yourself from your competition and add value to your proposition.
• Enhance your cash flow as payments are made within 48-72 hours of the agreement being made live.
• Remove the risk of not being paid by the customer as you are paid by the funder upfront
• Develop more strategic relationships with customers by getting involved with longer-term investment plans.

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Click here for more information on offering finance to your customers, or contact us today to chat through your options with our team.

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BS.202309.01BL69