Purchasing

5. Look at the Alternatives

Before buying any equipment, consider the various possibilities. Different choices will alter the amount of capital you need to put into your business and affect your costs.

Take the example of a furniture maker, starting in business and needing a supply of round, turned table legs.

The start-up's managers have several options:

5.1 Outright purchase of a new lathe.

• Can this new business afford to tie up its cash in capital equipment?

5.2 Purchase of a secondhand lathe.

• Will the machine be reliable?
• Is there a guarantee?
• Can the seller prove ownership?

5.3 Hire purchase of a lathe.

• Hire purchase is a way of buying without having to pay for your purchase in one go. Payments of capital and interest are typically spread over three to five years. It is like taking out a loan secured on the equipment.
• Compare the cost of hire purchase with that of other finance, such as a bank loan (see Financing your business).

5.4 Lease of a lathe.

• A lease allows you to pay for the use of something without buying it. The equipment can be returned to the owner at the end of the lease period - usually three to five years.
• Check the lease's small print. For example, do you need to give notice at the end of the lease and continue paying for three months?

5.5 Subcontracting out the lathe work to an outside supplier.

• Will the supplier work to the required standards and timescales?
• Can a subcontractor supply the quality that is needed at the right price and still make a profit?

5.6 Buying in ready-made round table legs.

• Do these meet the quality requirements?
• How do the costs compare?