Leasing in Business-Advantages-Disadvantages
What are the Advantages of Leasing?
(i) No Large Outlay
The biggest advantage of leasing equipment is that the cost is spread over a number of years; there is no need for you to pay the entire amount upfront. This can significantly help maintain cash flow, which is critical to all businesses. Poor cash flow is the main cause of small business failures, and leasing can help you to keep it under better control.
Leasing can also allow you to use better equipment (e.g. A more efficient / faster / more accurate product) that would be too expensive to buy outright.
When you lease a product, it is still owned by the leasing company, meaning that they have better security on your finance. This means you are unlikely to need any further security to be able to start a leasing contract, and therefore you have a much better chance of acceptance (passing the credit check) than with other forms of finance.
(iii) Tax Advantages
Lease rentals are considered as an operating cost, which means that it is often possible to deduct them from taxable profits (as a trading expense). However, you should always check that the equipment you are buying is eligible before agreeing to a contract.
If your business pays no or minimal taxes, then some leasing companies will claim the capital allowance on your behalf, and lower the leasing costs accordingly.
As a lease agreement is almost always a fixed contract, it is relatively easy to budget and forecast with. The amount can be worked into your businesses budget much more easily than an irregularly occurring lump sum; allowing you to keep a much better control over current and future cash flow. In the event that you need an item replacing quickly, you can do so with a relatively minor monthly adjustment to the budget, instead of a lump sum that could seriously damage cash flow.
What are the Disadvantages of Leasing?
(i) No Ownership
The main disadvantage of leasing is that you never own the product. It remains the property of the leasing company during and after the lease. The only exception being if you arrange for it to be sold to another company or person, in which case the leasing company would receive the money and a percentage would be passed back to you (depending on the amount, product type, age, and which leasing company you use).
As you do not own the product, you are unable to sell it in the event it is no longer needed, and you cannot upgrade to a newer or better product without either paying off the remaining contract, or paying a large fee to cancel the contract. You also need to carry on paying a smaller lease cost, even after the cost of the equipment has been fully covered.
Hire purchase will allow you to own the product at the end of the agreement, but this is normally more difficult to arrange, and is often available only on highly costly items.
(ii) Long Term Expense
Although leasing allows you to avoid paying a large lump sum, over a long period of time it often works out considerably more expensive. Over the course of a standard lease, you pay the cost of the equipment as well as the leasing companies charges.
After the lease finishes you need to carry on paying rental to use the product (although after the initial lease the cost of rental goes down significantly). This means that over a number of years, you will pay considerably more than the actual cost of the equipment without ever actually owning it.
Although you do not own the equipment that you lease, you are still responsible for its maintenance and repair. Unless you have specifically trained employees to fix the equipment, then this could prove very costly in the event of a serious fault.
Some leasing companies will allow you to cover the maintenance and repair costs for an extra sum (which is added to the monthly leasing cost). This will increase your monthly payments, but may save you money in the long run; particularly with manual or highly technical products that may go wrong frequently, and may cause severe disruption if out of action. Cover is normally through the leasing company itself, or through a separate insurance policy.
Car leasing is slightly different, as many of these agreements include basic maintenance. However, it is vitally important to check, as some will not include it in the basic price, and the terms and conditions will vary with each leasing company.
- Related Articles
- Popular Articles in Business Finance
- Overdraft Finance – Advantages and Disadvantages
- What is Invoice Discounting, Invoice Factoring, Debt Factoring and Invoice Finance?
- Bank Loans and Overdrafts as Business Finance
- Credit Card Finance – Advantages, Disadvantages and Tips
- Single Invoice Finance to help small businesses secure big orders