Whether you purchase or lease commercial property and equipment will have a significant impact on the growth and profitability of your business. It won’t always be a clear-cut decision so it’s crucial to have a complete picture before you jump into either. This article will help you better understand whether leasing or owning is an appropriate strategy to meet your current business demands and goals, regardless of your industry.
1) Leasing property
Choosing whether to buy or lease commercial property is an involved process with many factors to consider, but here are a few initial questions to get you started.
What are the development plans for this area?
A good location today doesn’t necessarily make for a good location down the road. City planning, zoning changes and future development can substantially affect the neighbourhood. Increased density and changes to infrastructure can impact access and parking. Zoning changes may even increase your taxes. Be sure to check with the municipality for any plans that may be in the works.
Be aware of environmental costs
Some commercial properties sit on previously polluted land, so be sure you review the current property owner’s environmental reports. Be aware that cleanup costs may have to be negotiated into the purchase price. Environmental regulations were not always as stringent as they are today, and cleanup costs can be staggering.
What is your company’s financial position?
Leasing space is typically the right decision if your company is new. If you’ve been in operation for a few years, you may be in a position to buy. Is your company profitable and are revenues strong enough to support both mortgage and property tax payments? Profits can be offset by claiming building and equipment depreciation, which may make purchasing more attractive.
The down payment on a commercial mortgage is often 25% to 35%. Can your business afford to tie up a large amount of capital in commercial property? Or would it be better kept for operations? And remember, as the property owner, you’ll be responsible for all repairs – even simple plumbing problems that can cost tens of thousands of dollars.
If your company faces an unexpected drop in business, you may need capital to carry it through. If funds are tied up in commercial property, they won’t be easily accessible. If you have to sell to raise the funds, it will take time and market conditions may not be favourable. This could significantly diminish your return on investment.
Owner equity and retirement planning
American entrepreneur Ray Kroc famously declared that McDonald’s was not in the hamburger business; it was in the real estate business. If you own a building outright, not only can you lease unused space and generate an additional revenue stream, you can also lease the entire space when you retire. When you’re ready to sell, the equity you’ve built up can provide you with a significant lump sum for retirement.
2) Leasing equipment
While in the long term leasing equipment typically costs more than an outright purchase, it can offer a number of distinct advantages: providing access to better equipment as well as keeping cash and credit available.
Access to better equipment
Equipment can be one of the biggest expenses in running your business. However, having the right equipment for the job is important for success. A lease can extend your ability to access better, more up- to-date equipment by reducing the capital outlay associated with purchasing or borrowing.
Don’t be afraid to ask questions about trade-up, lease breakage and end-of-term payout fee policies before signing your lease. These conditions are often hidden in the fine print, adding additional expenses you didn’t anticipate.
Flexibility
We all like having options, and, depending on your company’s financial situation, a lease can be flexible in both monthly payments and payment schedule. If you have a seasonal business, you may be able to pay less during slower periods. Stepped payments can allow you to make higher initial payments and lower ones in the future. Some suppliers will even offer equipment maintenance and repairs within the lease agreement so there are no expensive surprises down the road.
Talk to your leasing advisor about establishing a “leasing line of credit,” which can make funds available for leasing equipment as you need it. Your available leasing credit will fluctuate as you enter into or pay off your leases.
Tax savings
Did you know that lease payments are considered a business expense? As such, they can be written off against your earnings. On a shorter-term lease this allows you to write off your total expenditure quickly. If instead you purchase equipment, you can claim depreciation, but it can take many years to fully depreciate an asset.
Sold on leasing? Get the right support
If leasing is right for your business, establishing a relationship with a leasing advisor is extremely beneficial. Look for an advisor who takes the time to understand your business now, as well as your goals and vision for the future.
When you work with someone with the experience and resources to help navigate the options for acquiring new equipment, you’ll get the best leasing solution for your specific financial and business circumstances.
For further information on what may be beneficial for your business, please contact Steve Miller, business advisor.
To read the original article, please visit blueshorefinanical.com.
