What Is Positive And What Is Negative About Leasing

By Wade Henderson

Leasing has advantages and disadvantages. We show you here some of the most important ones in both areas.

Let us first name a few of the positive sides of leasing.

Through leasing a business owner can finance the totality of the investment and also maintain the self-borrowing capacity of the client. However, such operations are also part of the commercial and financial risks for banking purposes.

Leasing gives companies flexibility because the owner can predict how many payments he or she will make and adjust budget accordingly. This way, the company can fund through leasing other short term 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 has the potential of reducing the value of taxable items because they are not registered as new acquired assets but as expenses or services. The value of the machinery or piece of equipment may also reduce accelerated depreciation and therefore reduce taxes.

Nevertheless, there are some conditions for the tax exemptions to be applicable:

One condition is for the contract to be for the leasing of machinery or property. The period has to be from 2 to 10 years, the latter for leasing buildings. The leasing contract has to show all considerations related to the property. Additionally, the lessee has to be given the choice of purchase of the equipment.

Some of the disadvantages of leasing are:

The main drawback of leasing is the not getting ownership of the piece of equipment leased when the leasing contract ends. Some leasing contract will not allow the company to purchase the asset at the end of the contract.

Leasing also has a relative cost compared to bank financing. The company leasing the asset may have to pay for the cost of insurance which it would not pay if the bank had financed the purchase. - 32183

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