Should SMEs buy or lease their equipment?

Acquiring the tools, vehicles or raw materials your business needs can put a real strain on cashflow. What factors should SMEs consider when deciding whether to buy or lease?

Businesses that fuel growth by investing heavily in assets such as machinery, tools, products, or raw materials – in sectors such as manufacturing, retail or catering, for example – must find ways of acquiring these assets without putting undue strain on cashflow. Finance companies, retailers and wholesalers offer various leasing solutions, many of which can result in the purchaser ultimately paying more but avoiding having to make big investments up front. On the other hand, companies that can afford to invest in expensive purchases can also benefit.

The popularity of leasing

Leasing is a popular solution for SMEs looking to acquire fixed assets such as machinery and equipment. These let companies essentially borrow an item for an agreed period of time and for a set (usually monthly) group of payments. Sometimes, at the end of the term, the option exists to buy the item outright at a greatly reduced price than the business would otherwise have paid at the outset. This is a popular route for obvious reasons. Most start-ups cannot afford major purchases like a fleet of commercial vehicles or specialist machinery and will therefore lease such assets and spend their monthly savings on new products, business development and recruitment.

Leasing has several other advantages. Repayments are usually fixed and transparent, they don’t have to be secured against private property, and agreements cannot be cancelled by the lender unless the company leasing the item falls behind on payments. In this way, it’s easy to maintain the quality of the equipment being leased, as you are not responsible for maintenance or repair. Once the agreement expires, you simply start again with a brand new line of equipment, and if it breaks down in the meantime, you simply call the company repairperson. The popularity of leasing also means companies have plenty of leasers to choose from, as well as a host of competitive deals.

Leasing risks and capital allowances

However, leasing is not entirely without risk. It is often more expensive to lease an asset over a prolonged period than it is to buy that item in one go, while some items require a substantial deposit or early payment that could impact on your cashflow anyway. And if you find you no longer need the item, leasing arrangements can be difficult to cancel, and may come with penalties if you do. Therefore, if your business suddenly becomes cash-rich and you want to invest in a fleet of new vans, computers or printing presses, then you may need to find a home for the old ones – and keep paying for them!

Capital allowances are a consideration when deciding to lease or buy outright. Businesses generally cannot claim capital allowances of leased assets if the lease period is short; usually less than five years, but in some cases less than seven. Once an item is purchased, HMRC considers you the owner for tax purposes and will therefore allow you to claim capital allowances. Buying outright may even make you eligible for tax relief. Visit HMRC’s page Capital allowances: the basics for more information. 

Buying outright 

Buying equipment outright becomes a serious consideration when that equipment is likely to have a long and useful life and won’t become obsolete quickly, items like office furniture or farm machinery, for example. In this case, a bank loan with low interest repayments could be a better option than leasing. These will also serve to drive up the value of your business if your company becomes very successful and reaches the stage where selling it becomes an option. In this case, potential buyers can see leasing agreements as liabilities.

Whether you decide to buy or lease your business equipment will depend on your business’ requirements in the short, medium and long terms. Consider your options carefully, think about repayment terms, get-out clauses and interest rates, and make your decision based on a full assessment of the facts.

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John Carroll - Helping businesses achieve International success. Head of Product Management & International Business, Santander UK