Leasing works as a method for financing a company's operations, but just like everything else it has positive and bad aspects to it.
The advantages are:
One of the main aspects of leasing is the fact that it allows an owner to fund an asset through its own resources and still keep an attractive profile for future bank funding. These operations may be operationally and financially risky for some banking standards.
Another attractive feature of leasing is its flexibility in terms of timing and the ability to purchase other goods. In general, leasing will allow a company to have more working capital to acquire new and less expensive assets.
Leasing allows companies to maximize savings and the efficient use of working capital. When a company has more available funding, it can then invest on new and more sustainable technology and materials. On the contrary, a business not using leasing has to look for expensive sources of funding like banks or capital investors. This makes leasing attractive because the company does not have to divide social equity in shares and cede control to external new partners.
Leasing may also reduce the amount of taxable dollars through amortization. Given that the value of a leased piece of machinery is not actually registered as a purchase spending is reduced and within a period maybe smaller than the accelerated depreciation.
Nevertheless, there are some conditions for the tax exemptions to be applicable:
The leasing contract can only be for machinery or property and must be leased from a period of 2 to 10 years. The latter is used mostly for long term assets like the leasing of property. The contract has to include all considerations related to the use of the property. The leasing contract should also include a clause that gives the lessee the option of buying the asset.
Leasing also has disadvantages, some of them are:
The most important is the fact that the company does not own the asset at the end of the contract. Access to the ownership of the asset at the end of the contract, to exercise the purchase option.
Increased cost of debt relative to bank credit because the client must pay insurance on the property, which would not have to pay if the property was financed with a traditional bank loan.
The advantages are:
One of the main aspects of leasing is the fact that it allows an owner to fund an asset through its own resources and still keep an attractive profile for future bank funding. These operations may be operationally and financially risky for some banking standards.
Another attractive feature of leasing is its flexibility in terms of timing and the ability to purchase other goods. In general, leasing will allow a company to have more working capital to acquire new and less expensive assets.
Leasing allows companies to maximize savings and the efficient use of working capital. When a company has more available funding, it can then invest on new and more sustainable technology and materials. On the contrary, a business not using leasing has to look for expensive sources of funding like banks or capital investors. This makes leasing attractive because the company does not have to divide social equity in shares and cede control to external new partners.
Leasing may also reduce the amount of taxable dollars through amortization. Given that the value of a leased piece of machinery is not actually registered as a purchase spending is reduced and within a period maybe smaller than the accelerated depreciation.
Nevertheless, there are some conditions for the tax exemptions to be applicable:
The leasing contract can only be for machinery or property and must be leased from a period of 2 to 10 years. The latter is used mostly for long term assets like the leasing of property. The contract has to include all considerations related to the use of the property. The leasing contract should also include a clause that gives the lessee the option of buying the asset.
Leasing also has disadvantages, some of them are:
The most important is the fact that the company does not own the asset at the end of the contract. Access to the ownership of the asset at the end of the contract, to exercise the purchase option.
Increased cost of debt relative to bank credit because the client must pay insurance on the property, which would not have to pay if the property was financed with a traditional bank loan.
About the Author:
Wade Henderson - very Professional - 15 yrs in the Business Finance Field - reputation for getting the deal done. IMMFinancial.com
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