ADVANTAGES OF LEASING

BALANCED CASH OUTFLOW

The biggest advantage of leasing is that cash outflow or payments related to
leasing are spread out over several years, hence saving the burden of one-
time significant cash payment. This helps a business to maintain a steady
cash-flow profile.

QUALITY ASSETS
While leasing an asset, the ownership of the asset still lies with the lessor
whereas the lessee just pays the rental expense. Given this agreement, it
becomes plausible for a business to invest in good quality assets which
might look unaffordable or expensive otherwise.

BETTER USAGE OF CAPITAL

Given that a company chooses to lease over investing in an asset by
purchasing, it releases capital for the business to fund its other capital needs
or to save money for a better capital investment decision.

TAX BENEFIT
Leasing expense or lease payments are considered as operating expenses,
and hence, of interest, are tax deductible.

OFF-BALANCE SHEET DEBT

Although lease expenses get the same treatment as that of interest expense,
the lease itself is treated differently from debt. Leasing is classified as an off-
balance sheet debt and doesn’t appear on the company’s balance sheet.

BETTER PLANNING
Lease expenses usually remain constant for over the asset’s life or lease
tenor or grow in line with inflation. This helps in planning expense or cash
outflow when undertaking a budgeting exercise.

LOW CAPITAL EXPENDITURE

Leasing is an ideal option for a newly set-up business given that it means
lower initial cost and lower CapEx requirements.
NO RISK OF ABSOLESENSE
For businesses operating in the sector, where there is a high risk of technology
becoming obsolete leasing yeilds great turns and saves the business from the
risk of investing in a technology that might soon become out-dated. For
example, it is idea for the technology businesses.

TERMINATION RISK
At the end of leasing period, the lessee holds the right to buy the property and
terminate the leasing contract, thus providing flexibility to business.

DISADVANTAGES OF LEASING

LEASE EXPENSES
Lease payments are treated as expenses rather than as equity payments towards
an asset.

LIMITED FINANCIAL BENEFITS

If paying lease payments towards a land, the business cannot benefit from
any appreciation in the value of the land. The long term lease agreement
also remains a burden on the business as the agreement is locked and the
expenses for several years are fixed. Lease agreement, in a case when the
use of asset does not serve the requirement after some years, lease
payments become a burden.

REDUCED RETURN FOR EQUITYHOLDERS

Given that lease expenses reduce the net income without any appreciation in value,
it means limited returns or reduced returns for an equity shareholder. In such a
case, the objective of wealth maximization for shareholders is not achieved.

DEBT
Although lease doesn’t appear on the balance sheet of a company, investors
still consider long term lease as debt and adjust their valuation of a business
to include leases.

LIMITED
Given that investors treat long-term leases as debt, it might become difficult
for a business to tap capital markets and raise further loans or other forms of
debt from the market.

PROCESSING AND DOCUMENTATION

Overall, to enter into a lease agreement is a complex process and requires
thorough documentation and proper examination of an asset being leased.

NO OWNERSHIP
At the end of the leasing period, the lessee doesn’t end up becoming the
owner of the asset though quite a good sum of payment is being done over
the years towards the asset.

MAINTENANCE OF THE ASSET

The lessee remains responsible for the maintenance and proper operation of
the asset being leased.

LIMITED TAX BENEFIT

For a new start-up, the tax expense is likely to be minimal. In these
circumstances, there is no added tax advantage that can be derived from
leasing expenses.

CONCLUSION
To summarize, lease finance is appropriate for an individual or business
which cannot raise money through other means of finance like debt or term
 loan because of the lack of funds. The business or lessee cannot even
arrange the down payment money to raise debt. The lease works best for
him. On the other hand, the lessor, who wants to invest his money efficiently,
becomes the financier for the lessee and earns the interest.
To take an informed decision regarding the use of various types of
lease finance, we may have a look at the comparison of lease finance with
other forms of finance.
Lease Finance vs Term Loan
Lease Finance vs Installment Sale
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Last updated on : July 5th, 2018
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About The Author

 Sanjay Bulaki Borad
Sanjay Borad is the founder & CEO of eFinanceManagement. He is
passionate about keeping and making things simple and easy. Running this
blog since 2009 and trying to explain "Financial Management Concepts in
Layman's Terms".

6 Comments

1. Seith 
So helpful, thanks
Reply

2. Paul Sharp 
Leasing for the long-term is not an ideal way to go ahead. You can use this
for a year, maximum. I will suggest you to do the same even if you are into
property sale and lease back scenario where you only lose the ownership
status right after the deal is over.
Reply

3. Lissa 
Great work, Thank you
Reply

4. dalton sokontwe 
the cool
 Reply

5. pascal khamis 
great
Reply

6. ATUL MOHANLAL VALA 

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Regards,
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Reply

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