benefits of leasing

The tax benefit is available to both the parties, i.e., Lessor and Lessee. Lessor, the owner of the  asset, can claim depreciation as an expense on his books and therefore get the tax benefit. On the  other hand, the lessee can claim the monthly lease payments, i.e., lease rentals as an expense and achieve tax  benefits in a similar way. Leasing expense or lease payments are considered as operating expenses, and hence, are tax deductible.

Ownership is avoided to avoid the investment of money into an equipment asset. It indirectly  keeps the infusion of capital low and hence opportunities for borrowing money remain open for  the business. Investor can see the cash they infuse going to operations instead of frozen in  equipment, as an example.

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. The primary advantage of leasing business  equipment is that it allows you to acquire assets with minimal initial expenditures. Because  equipment leases usually only require a 1-2% commitment fee instead of a typical 20%, or more,  down payment, you can obtain the goods you need without significantly affecting your cash  flow. Normal lending institutions as well as equipment financing companies not only require a  down payment, and in some industries, offer a shorter term and charge a much higher interest  rate. With the current published inflation at 5%, and which may go higher, you are making  payments with cheaper and cheaper dollars each month.

While leasing an equipment asset, the ownership of the asset still lies with the lessor whereas the  lessee pays the rental expense. Given this agreement, it becomes plausible for a business to  invest in good quality equipment assets which might look unaffordable or expensive otherwise.  This allows the business to get the top of the line of one or more pieces of equipment, thereby  increasing their production capacity, with the latest technology, and the extra money saved by  not buying equipment can be used for the operations of these new higher capacity assets.

If a company chooses to lease, rather than investing in an asset by purchasing, it releases capital  for the business to fund its other capital needs or to save money for a different capital  investment. Ownership and tax breaks may make buying business equipment appealing in some  industries, but high initial costs and loss of the use of the cash may mean this option isn't for  every industry.

Leases are usually easier to obtain and have more flexible terms than loans for buying  equipment. This can be a significant advantage if you have bad credit or need to negotiate a  different payment plan to lower your costs.

Lease expenses remain constant for the term of the lease life and typically will remain the same  if the lease is renewed. This helps in planning expense or cash outflow when undertaking a  budgeting exercise. In addition if budget constraints would normally not allow buying new  equipment, a lease allows the company to do so in order to take advantage of market changes or  other opportunities, they otherwise would miss.

Leasing is an ideal option for a newly set-up business because it means lower initial cost and  lower capital expenditure requirements.

At the end of the leasing period, the lessee may return the equipment and terminate the leasing  contract or renew the lease at typically the same terms and thus provide flexibility to the  business.

In addition to the opportunity to acquire “new” equipment with leasing, there is the opportunity  to sell “pre-owned” current used equipment and lease it back. Here, the company’s old  equipment will be bought and then leased back to the company. Once again, releasing all the  cash tied up in this depreciating asset to be used for generating an ROI with that cash. In  addition, if the “old” equipment has been fully depreciated, and therefore the loss of the tax  benefit, you now have a new tax benefit by writing off the lease payments.