Advantages and Disadvantages of Lease Financing

Advantages of Lease Financing:

Ø   It offers fixed rate financing; you pay at the same rate monthly.

Ø   Leasing is inflation friendly. As the costs go up over five years, you still pay the same rate as when you began the lease, therefore making your dollar stretch farther. (In

addition, the lease is not connected to the success of the business. Therefore, no matter how well the business does, the lease rate never changes.)

Ø   There is less upfront cash outlay; you do not need to make large cash payments for the purchase of needed equipment.

Ø   Leasing better utilizes equipment; you lease and pay for equipment only for the time you need it.

Ø   There is typically an option to buy equipment at end of lease term.

Ø   You can keep upgrading; as new equipment becomes available you can upgrade to the latest models each time your lease ends.

Ø   Typically, it is easier to obtain lease financing than loans from commercial lenders.

Ø   It offers potential tax benefits depending on how the lease is structured.

There are several extolled advantages of acquiring capital assets on lease:

(1) Saving Of Capital: Leasing covers the full cost of the equipment used in the business by providing 100% finance. The lessee is not to provide or pay any margin to Manufacturer, Lessor and Lessee.

(2) Flexibility and Convenience: The lease agreement can be tailor- made in respect of lease period and lease rentals according to the convenience and requirements of all lessees.

(3)  Planning Cash Flows: Leasing enables the lessee to plan its cash flows properly. The rentals can be paid out of the cash coming into the business from the use of the same assets. 

(4) Improvement in Liquidity: Leasing enables the lessee to improve their liquidity position by adopting the sale and lease back technique. 

Disadvantages of lease financing:

Ø   Leasing is a preferred means of financing for certain businesses. However it is not for everyone. The type of industry and type of equipment required also need to be considered. Tax implications also need to be compared between leasing and purchasing equipment.

Ø   You have an obligation to continue making payments. Typically, leases may not be terminated before the original term is completed. Therefore, the renter is responsible

for paying off the lease. This can pose a major financial problem for the owners of a business experiences a downturn.

Ø   You have no equity until you decide to purchase the equipment at the end of the lease term, at which point the equipment has depreciated significantly.

Ø   Although you are not the owner, you are still responsible for maintaining the equipment as specified by the terms of the lease. Failure to do so can prove costly.