Buying a business

Posted on March 8, 2023 by Angus Jones

Starting a business from scratch means having no customers,no processes, no assets etc, however on the other hand buying an existing business could mean the hard work has already been done. Alternatively, buying an existing business can also be a way of expanding a business you already own. In this guide we will look at what you must consider.

WHY should you consider buying a business?

There are many advantages of buying a business, which for some might be buying themselves a job. For example, if you bought a lawn mowing business with all the equipment you immediately start to earn income with existing clients. Your chances for success are greater as the business already has runs on the board. Even the process of asking for a loan will be easier as there is a known risk. Ideally, you will buy a business that is undervalued or has the potential to grow through your hard efforts.
There are also disadvantages, like the business was misrepresented by the previous owner, that could be turnover, reputations, debts, etc.

WHAT do you need to consider when buying a business?

It is critical that before buying a business you do your research carefully. The more information you have the better the decision. Unless you have the skills we strongly suggest you retain the services of at least a business advisor, accountant, or lawyer. The following steps may be helpful

Where the business is conducted through a company

Do a company search to verify the vendor
ASIC Search
Are all ASIC compliance requirements up-to-date?
Does the company have any overseas operations?

Financial position

Review the last four years’ financial statements for the business. Analyse liabilities, inventory, and accounts receivable and payable.
Understand who currently owns the business such as shares, options, warrants as well as outstanding debt instruments.
Review an up-to-date copy of the business’ credit report.
Does the business have a loyal customer base? For example, subscriptions, loyalty programs, etc.
Have you considered the financial projections and major growth drivers of the business in the next four years?

Tax considerations

What are the tax obligations of the business to be purchased?
Have you obtained confirmation that all tax obligations – for example, income tax, GST, PAYG withholding, stamp duty, and payroll tax are up-to-date and paid?
Obtain the last four years’ tax returns, including supporting schedules and work papers of the business, such as capital allowance schedules, business activity statements, fringe benefits tax returns, etc.
Check if the business is currently being audited by the ATO or has been audited in the last four years and, if so, what the outcome was.
Have you considered the stamp duty implications of the purchase of the business? (fees payable to the government associated with the purchase)

Assets that you are buying that the business currently owns

Has a fixed asset register been obtained detailing all the assets being sold?
Have you sighted the assets and condition of the assets being sold?
Where assets are leased by the business, have you obtained copies of the leases?
Are the assets adequately insured until the settlement of the purchase?

Employee obligations

Have you obtained a list of the employees, including their salaries and other entitlements?
Do any employees have close contacts with customers that, if they were to leave, the business would be at risk of losing customers?
Are there any key staff who would be imperative to the smooth continued running of the business? Considerations should include special skill sets or knowledge.
Are you aware of all employment conditions, including key workplace agreements, incentive bonus plans, staff rotation policies, disciplinary procedures, etc.?
Have all outstanding employee entitlements, such as superannuation guarantee and annual leave, been accounted for?
Are the WorkCover premiums up-to-date?

Inventory

Does the current inventory include any obsolete stock?
Has the inventory been valued at market value?

Business premises

Do you have copies of all real estate lease agreements, deeds, mortgages, and any documents relevant to the premises?
If the same business premises are to continue, has the vendor facilitated a lease transfer to you?

Miscellaneous

Do you know why the vendor is selling?
Has the vendor attempted to sell the business before?
Is there a documented business plan?
How complex is the business? Do you have the skills required to continue?
Are the business operations subject to any government regulations? If so, are all relevant government licenses, permits or consents up-to-date?
Have you done a competitive analysis? Do you need a non-compete clause to stop the vendors from setting up in competition?
Does the business have any pending or ongoing lawsuits or any recently finalised litigation cases?
Have you searched the local council and other government agency records to ensure there are no plans or council orders that could disrupt the business or lead to a potential drop in sales?
Have you identified the key customer and supplier contracts, and the likely impact a change of ownership might have on these agreements?
Review the business’s current production, distribution, sales, and marketing strategies (including websites and social media) and the likely impact of a change of ownership.
Have you considered potential issues that could negatively impact the viability of the business (e.g. changing technology, trends, etc.)?
Are there any intellectual property matters to consider? For example, trademarks, licenses, patents, etc.
Seek advise on other questions you should answer

HOW do I buy a business?

Once you have completed all your due diligence and you want to move ahead its time to make an offer. Be prepared to negotiate. Once you agree you will need a contract. We strongly suggest you retain a lawyer in this process. The written contract ensures that both you and the seller clearly understand what each agrees to, for what cost, and what method of payment.

You should also understand what training will be needed and, if the original owner continues to work in the business, a specified period to do a handover.

HINTS

As the last thought we suggest you:

Make sure this is a business you want to buy
Don’t assume you will not have to work hard yourself and you are buying a money train
Have a clear vision and plan for the future
Keep records of all conversations and all documents
Do your homework

SUMMARY – Get help from a business consultant

Buying a business can help you grow quickly but be sure to follow some strict due diligence to minimise any nasty surprises. Your accountant or business advisor would be a good independent advisor for the purchase.

Car Leasing and vehicle financing

Posted on February 8, 2023 by Angus Jones

Your business needs a vehicle, and you do not have the spare cash to buy it outright. What options do you have? This guide will look at the options for car leasing.

WHY do you need a Car Lease?

Your vehicle represents your business and your key means of earning revenue. Unfortunately, few businesses have enough cash to buy a vehicle outright, so financing must be sought.

WHAT are my vehicle financing options?

Business loan – a financial institution lends you the purchase price. If your business is brand new, you will likely need to provide personal guarantees.

Credit Card – high interest and reduces your credit limit

Car Lease – essentially, you rent the car for a period with the option to buy at the end. Great for freeing up money that can be spent on other things

Hire Purchase – similar to lease, but the business owns the asset after the last payment is made

Chattel Mortgage – business car loan where the vehicle is security for the loan

Car Subscription Service –the car is provided for a fixed weekly fee with the option to swap or stop the subscription with short notice.

Long-Term Rental – fixed cost for a fixed term and may or may not include insurance, fuel, and maintenance.

HOW do I decide if car leasing is right for my business?

Leasing is suitable if a new vehicle is required every 3-5 years. Remember, a newer car will be more reliable and give a good impression of your small business. Some leases may have a balloon payment at the end of the lease, or you have the option to buy outright.

A car lease does not necessarily have to be a direct cost to the business. A small business owner may allow employees to salary package a novated lease.

Put simply, a novated lease is a car finance package that allows your employer to make lease payments for you from your pre-tax income for the term of a lease whilst you are still employed. This has the effect of reducing your taxable income, which in turn, reduces your income tax.

Most often, a lease will include running costs such as registration and servicing. The employee will be liable for Fringe Benefits Tax (FBT), which is based on a forecast that uses the value of the car and the distance of your business travel vs personal use to determine an amount.

If the business takes out the lease, there are two options, a Finance Lease or Operating Lease. With a finance lease, the vehicle is bought by a finance company and rented out to the lessee over a lease period. At the end of this period, the lessee must either purchase the car from the finance company by paying the residual value or lease the vehicle again. Operating leases are like a finance lease, except the lessee is not responsible for the residual value at the end of the lease – the car is handed back to the finance company. Some businesses with a high turnover of vehicles use operating leases to reduce administration costs. Operating leases can include all charges for a fixed monthly payment.

Your accountant can help you understand the costs of buying vs leasing.

HINT

For a business, depending on the circumstances of use and current legislation, lease payments are tax-deductible. The car leasing advantage is a more predictable cash flow. This vehicle financing method should not significantly affect the small business’s borrowing power for other purposes. The lender may claim the GST on the car’s purchase price if you are eligible. Only the vehicle’s price, exclusive of GST, is financed, lowering monthly payments.

When deciding, do not take the first deal offered to you. Different companies will offer different prices. Make sure the leasing company is reputable, and last but not least, be realistic about how much you can afford each month.

SUMMARY – compare companies for car leasing

Car leasing is a cost-effective way to get your business mobile without borrowing money. Ensure your business or individual can support the payments and that you compare leasing companies to get the best deal.

Tax return for small business

Posted on June 16, 2022 by Angus Jones

If you are paying taxes, you are making money. All small businesses have tax and reporting obligations, and this guide will help you understand what is required to do a tax return for a small business and where you can get help.

A tax return is the completion of documentation that calculates a business’s income earned with the amount of tax payable to the Australian Tax Office (ATO).

WHY should you do a tax return?

It’s the law
You may get a refund
It helps you understand the true position of your business

Irrespective of your business structure, you must submit an annual tax return. Sole traders and partnerships will be taxed at the individual income rates as part of your personal income. Companies must lodge a tax return as a separate legal entity and pay tax at a rate of 26% (in 2020/21 dropping to 25% in 2021/22 details here) of every dollar earned.

WHAT do I need to understand about small business taxation?

Your taxable income = assessable income – deductions

Assessable income is your total earnings before tax from an everyday business source such as sales and other business activity like capital gains. It does not include GST.

Deductions are any expenses incurred in running your business.

Sole traders must include any salary or wages in their tax returns, and the ATO will calculate if any tax is owing or a refund is due. A sole trader not paying themselves a salary, including PAYG withholding tax, is likely to receive a PAYG instalment for estimated income to be earned.

Partnerships must lodge a partnership tax return. Then as an individual partner, you must lodge an individual tax return for your share of income or losses. The partnership does not pay income tax; rather, the partners themselves do.

Trusts and beneficiaries must lodge a trust tax return. Then as an individual trust beneficiary, you must lodge a company or individual tax return for your share of income or losses.

Companies lodge a company tax return and pay company tax on assessable income. Companies might pay PAYG (pay as you go). The ATO will inform you if you need to pay PAYG instalments; however, as a general guide, expect to pay it if your assessable income exceeds $2 million. PAYG is a means to collect tax throughout the year versus waiting until the end of the financial year. You can also make a voluntary payment or apply for a variation if you feel your circumstances have changed.

HOW do you lodge a tax return?

A tax return should be lodged by 31 October for the previous year. Exceptions may apply if you use a registered tax agent or file a company tax return. A tax return must be lodged every year you run a business, even if you don’t expect you will have to pay tax.

You can lodge a tax return:

By paper
Online via myTax if you are a Sole Trader
Via a registered tax agent
If you are a company, trust, or partnership by standard business reporting (SBR). See our guide on accounting software

If you are required to pay PAYG on your business earnings, this will become part of your BAS reporting and payment requirements. More details on this can be found in our BAS guide. The benefit of having PAYG is that tax is paid during the year, and you can budget to make these payments rather than having a large lump sum payable at the end of the year.

After you have lodged an electronic tax return, the ATO aims to finalise the return in approximately two weeks. The ATO warns that processing may be delayed if there are incorrect or incomplete details in your return.

When completing your income and deductions for business:

keep accurate and complete records of your assessable income and expenses
use the correct method for calculating and reconciling the amounts you claim
report all income and deductions to ATO at the right time
pay any amounts owed on time
only use valid business deductions
- the expense must have been for your business, not for private use
- if the expense is for a mix of business and personal use, you can only claim the portion that is used for your business
- you must have records to prove it

Types of expenses that are not deductible include entertainment expenses, traffic fines, and private or domestic expenses such as childcare fees or clothes for your family. GST cannot be claimed as an expense if you have already claimed it as a GST credit.

If a prepaid expense exceeds $1000 and you will not receive the goods or service within 12 months, or it is not eligible for an immediate deduction, the expense will need to be apportioned over time.

A capital expense for items such as machinery or equipment will normally be needed to be apportioned over time.

HINTS

The Australian Tax Office provides an online search engine to assist small businesses http://www.sba.ato.gov.au/

You can also book an after-hours phone call http://www.sba.ato.gov.au/Forms/Book-an-after-hours-call-back—small-business-support/

The ATO provides an app providing tax and super information and tools https://www.ato.gov.au/General/Online-services/ATO-app/

If you employ people, you will also have PAYG withholding tax payments you will need to make from your workers’ wages. See our guide on payroll.

SUMMARY – PAYG small business tax

You must pay tax on your assessable income minus deductions. The way you submit a tax return is based on your business structure. You will likely pay PAYG tax in instalments throughout the year, with your tax return determining if any further payments are required or if you are due a refund. Accurate records must be maintained; deductions will only be accepted for valid business deductions.

Close a business

Posted on April 21, 2022 by Angus Jones

We understand this is a difficult time for you, and this guide will take you through the steps you should consider to close a business.

The most common reasons for closing a business include the business is no longer viable, costs exceeding income, or you wish to retire, and the business has no value without you.

WHY should you close a business?

There is a fine balance between the emotional desire to be successful and the reality of financial stability. A decision to close your business might not be needed if you get some help from a business advisor or an accountant. Similarly, they may also recommend closing your business is the best action. Unfortunately, the truth can be the most painful thing to accept.

Recognising that it is time to close your business may save you from further debt that will still need to be repaid.

If you are closing your business to retire, this can be an exciting time to start a new chapter in your life.

If you are in doubt, these are key indicators that should encourage you to question your business viability.

You feel you should close
You are losing money
Your goals are not being met
Many customers but no profits
Your product or service is not needed or wanted
Nothing you have tried has worked
Marketing is making no difference
Competitors dominate your industry
No long-term customers
Your dream is not the reality
Home and work life is suffering
Employees are leaving
Your health is suffering
Trouble sleeping
You have become negative and angry

WHAT are the steps to close a business?

Once you have decided to close your business, it is best if you work on a plan to achieve this.

The first step is to decide on a date that will allow you to accomplish the following tasks:

Notify your employees. This will be difficult for them as well, and you will need to pay out any outstanding wages and leave. Also, ensure that the employee’s superannuation has been paid.
Suppliers. Let them know the date and plan to pay any outstanding debts.
Notify your customers. It would be best if you showed those who have been loyal to you the courtesy of letting them know you can no longer supply them. This could be done with a sign on your website or a phone call. It may also be an opportunity to sell off any remaining stock or assets.
Pay outstanding bills.
Cancel services, including the Internet, power, bank accounts, web hosting, social media accounts, etc.
Sell your business assets. These can include stock, fixtures, tools, machinery, intellectual property and domain names.
End lease agreements. This could be for machinery or property but remember, based on the terms you have in your lease agreement, you may still be obliged to continue payments until the end of the lease term.
Taxation responsibilities. You must pay outstanding taxation debts, including income tax, GST and capital gains. There is also a requirement for you to post final tax returns and a final GST activity statement.
Cancel your ABN. https://www.abr.gov.au/business-super-funds-charities/updating-or-cancelling-your-abn/cancel-your-abn
Cancel your business name. https://asic.gov.au/for-business/cancel-your-business-name/
Keep business records. Records should be kept for a minimum of 5 years after you close.

HOW can I get help to liquidate?

The following resources may be useful in helping with this process:

Your accountant and or business advisor can assist you with the decisions to keep, close or sell a business. Business advisors can be found here https://www.business.gov.au/expertise-and-advice.

Suppose a registered company becomes insolvent and goes into liquidation. In that case, a liquidator must be appointed to take control of the company so that its affairs can be wound up in an orderly and fair way for the benefit of all creditors. More details on this can be found here https://asic.gov.au/regulatory-resources/insolvency/insolvency-information-for-directors-employees-creditors-and-shareholders/.

Auction houses like Grays Online can provide a means to sell off your excess stock and assets.

Bankruptcy is a legal process when you are unable to pay your debts. It is a means that allows you a fresh start but may affect your ability to get credit, travel overseas and gain future employment. More details https://www.afsa.gov.au/insolvency/cant-pay-my-debts/what-bankruptcy

National debt helpline provides free financial counselling https://ndh.org.au/ or 1800 007 007

Crisis support – Lifeline.org.au or 13 11 14

Mental health – Beyondblue.org.au or 1300 22 4636

Family dispute resolution – Relationships Australia https://www.relationships.org.au/what-we-do/services/family-dispute-resolution

HINTS

The Australian tax office provides a business viability tool to help determine if a business is still viable. https://www.ato.gov.au/Calculators-and-tools/Business-viability-assessment-tool/

SUMMARY – a big decision for any small business owner

Closing a business is a big decision for any small business owner. Be sure that you are making the right decisions and not emotional ones. If your business is not going well, be careful in taking on additional debt. Create a plan around closing your business and make sure you do the best for those who have supported you, like employees, customers and suppliers. Don’t be afraid of asking for help. There are several free services to support you.

Record Keeping for small business

Posted on September 14, 2021 by Angus Jones

Running a small business is about understanding what is going on and about meeting your obligations. You might have obligations to employees, suppliers, the taxman or more simply an obligation to yourself to understand if you are making any money or the ability to look up a past agreement. This guide will look at why record keeping is important, what you need to keep records on, and how to keep good records.

Record keeping is the activity or occupation of keeping records or accounts.
Record keeping in financial terms is the process of recording transactions and events in a ledger or accounting system. Since the principles of accounting rely on accurate and thorough records, record keeping is the foundation accounting.

WHY should I care about record keeping?

Keeping good records is important for any small business. Whether that is to help manage your costs, whether it is for legal, regulatory or tax reasons, or simply to help manage and improve your business. Collecting, storing, and effectively analysing your data is vital.

Without adequate records, it would be impossible to measure the health of your business and to keep track of your progress. It also helps avoid fines for doing the wrong thing and demonstrate your financial position if you need a bank loan.

Records must be kept by law for:

5 years for Australian Tax Office purposes
7 years for Human Resources time and wages records
2 years after you have offset a capital loss against a capital gain (individuals & small business)

Keeping good records will make running your business easier and save you time in the long run.

WHAT should I keep records on?

The types of records you should consider keeping include:

Client Files
Contracts
HR required records for 7 years
- employee details including pay, leave and work hours
- reimbursements of work-related expenses
- workers compensation insurance for each employee
- pay as you go (PAYG) tax instalments
- superannuation contributions
- ending employment
HR records recommended:
- resumes and job applications
- contracts of employment
- performance reviews
- trade or registration certificates
Business records (for example, business registration, formal meeting minutes etc)
General business information (for example, job tracking, customer correspondence)
Accounting and tax for 5 years
Business expenses
Bank statements / credit card statements
Annual tax returns
Quarterly/Monthly tax filings
Payroll
Inventory
Sales
Revenue
Petty cash
Vehicle logs
Invoices
Cancelled cheques and cheque stubs
Purchase orders

HOW do I make record-keeping easy?

Under Australian law records must be:

readily accessible if required
must be unchanged and must be stored in a way that restricts the information from being changed or the record damaged (changes may be permitted for correcting an error)
in writing (electronic or paper)
legible
in English
explain all transactions
accurate and not misleading

A bookkeeper or your accountant can help with this process but this will not remove your need to still be involved in keeping accurate records.

Although you can keep records on paper it will be much easier if you do so electronically. Refer to our essential guides on expense management, accounting software and payroll software to understand more. If you are concerned about outlaying funds for software you could set up a series of spreadsheets to help manage your accounts.

Other key documents like signed contracts, lease documents etc should be kept in a safe preferably fireproof storage. These documents can also be scanned and stored electronically ensuring you have back up copies. Refer to our guide on Storage and sharing of files.

Electronic solutions and storage of records have the following advantages:

back up records in case of disaster
automated processing and provide ready-made reports
produces taxation and employment reporting requirements for government submission online
keep up with the latest tax rates, laws and rulings
save on physical storage space

HINTS

The Australian Tax office (ATO) provides a record-keeping evaluation tool which will help you evaluate how well you are keeping your business records. https://www.ato.gov.au/Calculators-and-tools/Host/?anchor=&anchor=RKET/#RKET/questions

The ATO provides an App for sole traders to help them record business income, expenses, and vehicle trips. https://www.ato.gov.au/general/online-services/in-detail/mydeductions/mydeductions/

SUMMARY – keep records under Australian law

Record keeping is not just about keeping records for accounting. Under Australian law, some taxation, superannuation and employment records must be kept for 5 or 7 years.

Accurate and regimented record keeping will help you find the information you need, provide reporting and make running your business easier. Modern accounting and payroll cloud-based solutions will not only streamline the process but also produce required government reporting for you.

Lack of record-keeping, false or misleading reporting can result in fines. Always ensure you have backup copies.

Small business accountant is unexpected hero

Posted on May 4, 2021 by Angus Jones

By Kerry Agiasotis, Managing Director and Executive Vice President at Sage Asia Pacific

Would you consider your small business accountant an ‘essential worker’? It is a phrase we have heard again and again the past year in the context of medical professionals, grocery workers and law enforcement, however never in the same sentence as ‘accountant’.

For small businesses, that is exactly what they are – essential. While accountants may not be providing medical care or keeping our grocery shelves stocked, they have, in many cases, helped keep the doors to many Australian businesses open throughout the ups and downs of the past year.

While the Australian economy is beginning to recover. March data from the Australian Bureau of Statistics found almost 20 per cent of small businesses think they will struggle to meet their financial commitments over the next three months.

With almost a fifth of small businesses feeling uncertain about their immediate future, there’s all the more need for accountants to maintain their ‘essential’ status in the months to come.

From number-crunchers to trusted advisers

Accountants worked all hours to keep their clients up to date with the latest changes, as the world locked down and the government rolled out emergency stimulus packages.

Recent data from the Australian Bureau of Statistics found that three in five Australian businesses sought external advice, such as accounting services, to navigate the unchartered territory of the pandemic.

As the challenges facing businesses undoubtedly increased, the nature of the accountant’s role underwent profound change.

Many accountants admit they felt more like a counsellor at times while supporting their clients throughout this period. On a more positive note, one of our accountant partners recently noted her highlight was getting to know her clients personally as the pandemic prompted them to open up and have more meaningful conversations.

Fast forward twelve months, and those businesses lucky enough to have access to an accountant have come to realise that accountancy is not just limited to number crunching and financial reporting.

Instead, a small business accountant is a trusted advisers guiding business owners through make-or-break decisions around how best to manage cash flow, revenue streams and whether and how to pivot business models.

Technology the key to success

Although every accountant has his or her own unique experiences from the past year. I’ve consistently heard one piece of feedback that nobody could have dealt with the unforeseen challenges without technology.

As with many industries, the wholesale adoption of new technologies by accountants throughout the pandemic launched many practices years into the future.

Automated workflows from bookkeeping to tax, dashboards, customised reporting, and data-driven insights allowed them to keep their heads above water while focusing on what mattered the most: the needs of their clients.

Accountants who had instant access to financial and operational data were able to provide the best counsel to their clients so they could make the right decisions in the ever-changing environment.

This trend is accelerating in 2021 and beyond. As cloud-based, automated practice solutions continue to enable firms to become more productive, freeing up time for accountants to focus on running their practice and supporting their customers’ needs with timely counsel.

A trusted partnership for the future

If I were to look for a silver lining in the past year, without a doubt, it would have to be how technology transformed the accountant-client relationship.

It seems ironic that software helped bring people closer together. However, by leveraging new technologies such as cloud-based and automated practice solutions, accountants could free up time to focus on well-needed client counsel.

Despite the enormous adversity endured, businesses and accountants managed to weather the storm together, finding solutions to the seemingly impossible.

As we look towards the May budget, the reopening of borders, and life after the pandemic, businesses must continue to work even closer with their accountants to leverage new opportunities and mitigate risks that may arise.

By keeping your small business accountant close and recognising the value they provide as essential to your business, you will be well placed to capitalise on the strong economic growth that’s on the cards as we continue to bounce back from the pandemic.

Small Business Answers guide to accounting software can be found here.

Leasing vs Buying Equipment

Posted on February 17, 2021 by Angus Jones

Setting up or expanding a business can be an expensive exercise. To provide yourself with the tools and equipment you will have to either buy items or lease items. Almost anything can be leased from office equipment to machinery and tools. This guide will help you consider the choice between buying and leasing as well as providing further knowledge around the process of leasing.

Leasing of plant and equipment is obtaining the use of machinery, vehicles, or other equipment on a rental basis. This avoids the need to invest capital in equipment. Ownership rests in the hands of the financial institution or leasing company, while the business has the actual use of it.

If you do not have the available cash, further details on ways of acquiring finance can be found in our guide on Financing.

WHY should I lease versus buy?

To understand which is best in your situation it is best to understand the various advantages and disadvantages of each.

Leasing advantages include: making lower monthly payments rather than buying upfront, getting a fixed financing rate instead of a floating interest rate, benefiting from tax deductions on leasing costs, conserving working capital and avoiding cash-devouring down payments, and gaining immediate access to the most up-to-date business tools. The equipment also shows up on your income statement as a lease expense rather than a purchase. If you purchase it, your balance sheet becomes less liquid. The leasing company may also be responsible for repairs saving you maintenance costs.

Leasing disadvantages: You may pay a higher price over the long term versus buying. Leasing commits you to retain a piece of equipment for a certain period, which can be problematic if your business is unstable. Some brands or models may not be available to lease.

Buying advantages: Allows you complete control over your purchase including selection, modifying, and selling the asset for cost recovery. You can control repairs and service intervals. In certain cases, you can claim depreciation as a tax deduction. No agreements or contracts to agree to.

Buying disadvantages: Requires you to have cash flow and might force you into buying a cheaper model. If technology is outdated you have no easy upgrade path other than selling. Unless a warranty or insurance policy exists, repairs and maintenance will be an additional expense.

WHAT do I need to understand about leasing?

If you are just starting a business you may find it difficult to lease equipment. Lease companies will look at your lack of credit history but may consider your personal rather than business credit history during the approval process.

There are four types of equipment leases:

Finance Lease: Ownership of the equipment is with the business. It is on-balance sheet. Lease payments are tax-deductible. At the end of the lease, the equipment is returned to the Lessee or purchased by the business for an agreed price.

Operating Lease (Rental): Ownership of the equipment remains with the Lessor (it is off-balance sheet). Financing payments are tax-deductible. At the end of the lease, the lessee returns the equipment to the lessor or purchased by the business for an agreed price.

Commercial Hire Purchase: Equipment is owned by the business and it is treated as on-balance sheet finance. Only the interest portion of the payments is tax-deductible. The business can claim depreciation deductions on the equipment. At the end of the term, the equipment remains with the company. Sometimes there is a residual value payment required.

Chattel Mortgage: Equipment is owned by the business and the interest component of the payment is tax-deductible. The business can claim depreciation deductions on the equipment. This is a traditional secured loan where the equipment acts as security for the Lender. At the end of the finance term, the borrower remains as the owner of the equipment.

Watch for balloon payments, here you make small monthly payments with a large payment at the end. While this allows you to conserve your cash flow, the final balloon payment may be more than the equipment is worth.

If your lease requires you to return the equipment at the end of the lease and it’s worth less than the value established in the contract, you may be responsible for paying the difference. Also, watch for additional charges such as wear and tear.

HOW to buy or lease equipment?

Buying equipment is fairly straight forward however when selecting the right product you should consider:

What you need both now and in the future?
Would it be more cost-effective to have someone else’s plant or machinery do the task for you?
Do you have the right environment or space to operate this product?
Is the quality or reliability of product critical and does the extra cost make sense?
Do you need to buy new or will 2^nd hand work?
How easily and/or quickly can the product be repaired or serviced?

If you decide to lease, the above list also applies. You can secure an equipment lease through:

Banks and bank-affiliated firms. Banks may offer advantages, like lower costs and better customer service. Check whether the bank will keep and service the lease transaction after it’s set up.
Equipment dealers and distributors can help you arrange to finance using owned leasing subsidiaries or an independent leasing company.
Independent leasing companies.
Commercial leasing broker. Much like mortgage brokers, these people charge a fee to act as an intermediary between lessors and lessees.

HINTS

Every lease decision is unique, so it’s important to study the lease agreement carefully. Compare the costs of leasing to the current interest rate, examining the terms to see if they’re favourable. What is the lease costing you? What are your savings? Compare those numbers to the cost of purchasing the same piece of equipment, and you’ll quickly see which is the more profitable route.

SUMMARY – Leasing versus buying equipment

There are advantage and disadvantages of both buying and leasing. Make sure you:

Understand the tax consequences.
Make sure the product and the financing meets your needs.
Understand what the implications are at the end of a product’s useful life or the end of lease terms.

Your accountant should be able to advise you in these matters if you require additional assistance.