The advantages of leasing your equipment and other business assets include
- 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