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Facts that influence your equipment purchase
Questions to ask before you purchase or lease equipment
How to make the final decision between lease vs purchase
How a machinery loan can help
The decision about whether you should lease or buy the needed equipment for your manufacturing business depends on a variety of factors such as how large your business is, how important the machinery is for you and what your budget is. This set of 6 questions will help you make the decision of which form of machinery financing is right for you.
Leasing: If your manufacturing firm does not have funds for an outright purchase, this is the right option for you. Keep in mind, however, that this option may turn out to be more expensive in the long run.
Buying: If your business has the money for buying necessary equipment, this may be a cheaper and quicker option for you than leasing.
However, be careful that wanting to buy does not prompt you to choose low-cost machinery, which may become outdated too quickly. In order to ensure you get the best machinery for your business, consider taking a machinery loan.
Let’s consider a leather belt manufacturer, for example. He may simply buy hand tools, upper leather skiving machines, and side creasing machines since their cost is low. However, he may lease power-operated strap cutting machines and industrial sewing machines.
Leasing: It may be a better idea to lease sophisticated equipment as it comes with a high cost and high maintenance requirements. Sometimes, repair services are part of the lease agreement, which makes machinery maintenance easier for you. Secondly, if your machinery will soon become outdated, a short lease is better than an up-front purchase.
Buying: The drawback to buying advanced machinery is the high cost and the added cost of repair and upgrading. However, if this equipment is vital to your business then you can consider buying it and then selling it off in the future. Also, consider whether your machinery will become obsolete too soon. This can make buying it too expensive.
Let’s use the same example of a belt manufacturer. Since none of this equipment was hi-tech, he was able to buy most of it by taking a machinery loan that came with a high loan limit of Rs. 30 lakh, and was approved in 24 hours.
Additional Read : How to Choose The Right Machinery Supplier
Leasing: Your equipment could need constant upgrading if you are a part of a fast-paced tech industry. Leasing would enable you to get such upgrades at low costs or even free, depending on the terms of the contract.
Buying: When purchasing machinery, keep in mind the cost of upgrades and their frequency. Choose equipment with good warranty policies and a brand that is reputed for its customer service.
For example, an industrial sewing machine for a belt manufacturer could require frequent upgrades of parts like regulators or level pressers. However, he still chose to buy these sewing machines since these small parts did not carry a heavy price tag.
Leasing: Your sense of urgency in acquiring new machinery could be a deciding factor. In case your needs are urgent, leasing may not be right for you as it does take time. It involves paperwork and the signing of a contract between the lessor (the firm leasing you the equipment) and lessee (you).
Buying: In cases where time is a constraint and your business needs immediate acquisition of the machinery, buying it is a more feasible option since it involves no formalities. All you have to do is pay and your machines will be delivered to you. Do consider the shipping time for your equipment in case you are unable to source it locally.
Say the leather manufacturer just got an urgent order for belts. In order to carry out the order, he received 50% advance payment. In this case, he chose to take a machinery loan, in addition to the advance payment, to help finance the purchase of a few expensive machines that he knew would help him fulfill the order quickly.
Leasing: Depending on what type of lease you take, you can deduct the full lease payment of machinery as an operating expense or the interest on the monthly payment. Buying: A direct purchase allows you to claim depreciation on your machinery, which are considered business assets. Get the help of a tax expert who can gauge how your business can save more as per Section 32 of the IT Act. The leather manufacturer noticed that he was saving a lot more tax on leasing his costly machines.
Additional Read : Commonly Asked Questions Around Machinery & Equipment Loans
Business loans from Bajaj Finserv are designed specially to help growing businesses meet their financial requirements. Easy to apply for and hassle-free to avail, these loans come with several unique benefits that make them the ideal mode of business finance for small and medium sized enterprises. However, when applying for a business loan, there are certain dos and don’ts that you should keep in mind, in order to ensure that your application is processed smoothly. Here, we tell you what they are.
Leasing: This option doesn’t let you add the leased assets to the owned assets of your business. The equipment still belongs to the lessor.
Buying: A direct purchase lets you add the assets acquired into the balance sheet and hence strengthens your business’ financial standing.
The leather manufacturing was keen to buy most of his machines as he wanted to strengthen his books for a capital infusion in the form of a machinery loan.
While these five questions are sure to have helped you, the final decision depends on the cost and need of advanced equipment for your business.
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