1. Market considerations
First you should consider if this is the right time for your business to expand. The answer has as much to do with market forces as the strength of your business. If prices and interest rates are low, then you may be more confident about taking out finance to grow.
2. Costs and benefits of upgrading
You’ll have to crunch some numbers and consider both sides of the ledger.
Factors to consider include:
- What increases in sales, production and most importantly, profits, will your new investment give you over the year(s)? Consider this over the projected life of the new equipment or premises.
- Add the amount of depreciation and interest you will be able to claim on the new equipment (getting professional tax advice where you need to), and
- How much do you estimate you’ll receive from selling existing equipment or property?
Balance this against other factors such as:
- The costs of purchase, lease repayments or interest on loans
- What repair costs have you incurred with the current equipment, vehicles etc? How much will you need to put aside to cover increasing costs?
- How much time and money have breakdowns and repairs cost you?
- How much profit is being held back by being in smaller business premises?
3. Hire-purchasing versus leasing
The main differences between hire-purchase and leasing are that:
With leasing, ownership remains with the vendor and you have the option of purchasing at the end. The leasing payments are generally fully tax deductible. And GST can be claimed as well.
With Hire-purchase, regular repayments are made, with the ownership reverting to you, the lessee, at the end of the contracted period. You will be able to depreciate these assets and may be able to claim interest payments as tax deductions and claim all GST upfront.
Avoid these traps:
- When selling old equipment, vehicles etc, don’t forget to pay GST on the sale
- If the depreciation rates are low, it may be better to lease.
When you are ready to take out asset finance then talk to your bank about what they can offer. Terms and conditions, credit criteria and fees and charges will apply, of course. Read more about business loans.
Upgrading your business equipment or premises can be complex, as can the tax implications associated with doing it. So talk to your accountant, lawyer and business banker about what would be the best business structure for you.