Leasing is a contractual arrangement and has been in existence since a very long time. We have references for this method in even earlier textbooks. This is a temporary transfer of assets like vehicles and equipment from one person or business to another.
What is Leasing?
Leasing is a written agreement where one party grants the right to use the asset to the other for a monetary benefit. It is beneficial for both parties.
The lessor or the owner of the asset can earn money and lessee, or the user of the asset will have the product he needs for further use. Leasing is for a particular period, and after the conclusion of the same, the asset will have to be returned to the original owner.
If both parties agree to the terms, there is a provision where the lease can be renewed or the asset can be sold to the lessee or user.
The terms of the rental agreement remain the same during the period of leasing. Remember profitable businesses like corporations, partnerships, and proprietorships, along with non-profitable organizations, can take advantage of this rental contract.
As most businesses are making money while using the equipment compared with buying it, they are leaning towards leasing more and more.
1) 100% financing
If you are cash strapped and are interested in starting a new business venture, you can opt for 100% financing. The terms are set up in such a manner that the benefits of leasing include use of every equipment and asset without money changing any hands at the onset.
Yes, it is not cash-free as you will have to pay the lease payments as per the terms and conditions, but it will not be at the beginning of a new venture when you are trying your utmost to meet all the ends.
The lessee has no viable hurdles to cross as it is expected that he will be paying the lease payments from the enhanced revenues that the organization will earn at the commencement of the lease.
2) No risk of obsolescence
The asset that an individual is using as per the terms of a leasing contract is actually under the ownership of the lessor. It is he who bears the risk of obsolescence, whereas the lessee enjoys the benefits of leasing.
If a new version of the asset you are using has entered the market, you can easily replace the previous one with the new one. Rather than buying new equipment and blocking your money, you can set up new leases to stay current with new technologies.
It is the headache of the lessor to upgrade his assets with new and fast versions.
An important advantage of leasing is asset flexibility. A business entity can use an asset either for a particular period or for the entire life of that asset.
It is not his headache to find a buyer when he does not want to use it anymore. He just needs to return it to the owner as per the leasing terms.
Lease rentals are prepared in such a manner that it easily accommodates the wishes and position of the lessee. He is now able to pay from the amount he generates after using it. One important benefit of leasing is that it gives the lessee flexibility in terms of choosing the period of payments.
It is important that the user can generate the necessary amount of cash flow so that he can pay rentals timely and conveniently.
4) Low-cost financing
An important benefit of leasing is that it is anytime cheaper than the other alternatives that are available to you.
It gives the option of using an asset without actually going through formalities or cash payments involved in buying an asset.
5) Tax concession
An important benefit of leasing is that a lessee can structure his rental payments to gain appropriate tax concessions. You can increase rentals to reduce your taxable income in case of heavy taxation or vice-versa.
Remember all these payments have to be deducted from your income, and less is the income minimum is your tax. Both the user and the owner can avail themselves of tax benefits.
The lessor can claim depreciation and write it as such in his books, and the lessee can write lease rental as an expense. It is a win-win situation for both.
6) Off-balance-sheet financing
An important benefit of leasing is that it offers off-balance-sheet financing. The payment of the lease is a liability, but it is not reflected in the balance sheet.
As it is not mentioned in the financial statement, any new investor is not aware of any debt or lease payments the company owes.
7) Alternative use of funds
Alternative use of funds is an important benefit of leasing. It helps the lessee in acquiring and using plant and machinery, equipment, and other important assets without depleting the necessary capital. The finance is now spared and can be used by the business owner for alternative uses.
When you are exploiting the leased equipment, it enhances the capital position of your company.
8) Control over assets
Although the asset is of a lessor in actual reality, it is the lessee who is using it.
This makes him the economic user of the asset without the ownership papers. He has full control over the asset in his possession, and it is the lessor who remains the owner in the name.
Thus benefits of leasing include control over assets.
9) Speed and convenience
Leasing is a fast process where both the lessor and lessee are equally interested in completing the deal as soon as possible. If you reach out to a financial institution like a bank, it will become a long process that will include deliberations, reviews, and then answering.
An important benefit of leasing is that it is denied or approved within a short interval.
It is convenient and simple because it gives the lessee an option of spreading his associated costs like installation, shipping, and service evenly through the terms of the lease.
10) Outsource asset management
An important benefit of leasing is that it can be used to outsource asset management. Purchasing assets for the running, growth, and expansion of a business entity is never easy. The process does not end here as you will have first to maintain the asset in good condition so that it yields 100% results.
Later the business owner will have to dispose of this asset as per his convenience. This is a time-consuming process that will draw away important resources away from any priority.
Leasing will help you to spread the cost while offloading the asset from your premises.
11) Manage cash flow
When you have a good leasing contract, you will be paid at periodic intervals as part of the leasing contract.
An important benefit of leasing is that the fixed rates help you in managing cash flow which proves a good option unlike the rates offered by financial institutions which are variable and cannot be determined easily.
12) Conserve your capital
As technology is advancing at a greater pace, the depreciation on high-profile equipment assets is also on the rise. An important benefit of leasing is that it offers a business an alternative source for finance.
You can just lease the necessary equipment without the hassle of depreciation. Your borrowing power remains intact because you have not borrowed any money. The existing line of credit is still open for any further use.
13) Termination rights
When the leasing period expires, the lessee has the right to purchase that asset. Benefits of leasing include termination rights so that the lessee can have flexibility in running his business.
In this ever-changing world, the concept of “sharing economy” or leasing is on the rise as it gives the user the right to use a product at certain terms and conditions which he might not have the money to buy.
Purchasing assets for use during business activities are very expensive but at the same time a necessity. Daily survival, growth and expansion plans all depend upon certain assets, and at this time it is leasing which looks like a blessing in disguise.
It is actually a cost-effective as well as a flexible method of using business equipment without paying upfront for the product. It has now become possible to lease almost any product associated with your daily operations of business like software, hardware, and even capital equipment.