Leasing Advantages

April 13, 2006

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The advantages of leasing your equipment and other business assets include the following:

Reduced initial cash outlay — the main advantage of leasing is that you can generally gain the use of an asset with less of an initial cash expenditure than would be required if you purchased it. Equipment leases rarely require down payments.
Easier credit terms — You'll likely have an easier time finding someone willing to lease you equipment than finding someone willing to extend you credit to purchase the equipment. One reason is that with a lease, title to the property remains with the lessor so if you miss some payments, the lessor can quickly get the equipment back. Furthermore, under a lease you may be able to negotiate a longer payment period (resulting in reduced payment amounts) and/or a more flexible payment schedule (resulting in a better matching of your payment obligations with your cash flow) than you would be able to negotiate under a loan.
Avoidance of financial restrictions — an equipment lease rarely includes any provisions that restrict your future financial operations. In contrast, it is not uncommon for a loan agreement to include restrictions on your ability to acquire additional equipment or to borrow additional funds without the lender's permission.
Flexibility in addressing obsolescence — leasing may enable you to better keep pace with improving technology. For computers, communications devices, and other equipment that is subject to rapid technological improvement, you'll have an easier time convincing yourself to invest in updated equipment if you acquired your existing equipment under a short-term lease or a lease that includes an equipment substitution provision.
Flexibility in addressing need and suitability — if you're not sure whether you really need a particular item of equipment, leasing an item on a short-term basis will provide you the opportunity to evaluate the item's utility to your business without committing to a substantial investment. You can also use short-term leases as a way to test and compare different brands and models.
Maintenance support — under some leases the lessor may agree to be responsible for maintaining and repairing the leased equipment. Although the cost of this service will usually be factored into your rental payments, you'll at least avoid the problems of having to find qualified repairpersons and of being burdened with unplanned repair costs. Furthermore, a responsive lessor who is familiar with the equipment being leased can significantly reduce your equipment's downtime when repairs are necessary.
Current deductibility of rent — assuming that the IRS doesn't recharacterize your lease as a purchase for tax purposes, leasing provides a potential tax advantage in that your lease or rental payments are fully deductible if you use the leased asset in your business. In considering whether leasing will provide an actual tax advantage, however, you need to weigh the corresponding disadvantage of being denied any depreciation deductions with respect to the leased property.
Balance sheet appearance — a frequently mentioned advantage of leasing is that it may improve certain financial indicators, such as your debt-to-equity and earnings-to-fixed-assets ratios. The improvement occurs if you're able to exclude your leased assets and their corresponding rental obligations from your balance sheet but do include the earnings the assets produce (net of rent expenses) on your income statement. The actual benefit of the improved indicators may be negligible, since careful lenders will likely equate your lease commitments with long-term debt obligations. Current accounting rules have also eroded this benefit by requiring you to report on your balance sheet assets leased under many financial leases.