Why lease instead of purchase?
Businesses lease for a number of reasons:
- To conserve cash. Rather than pay the entire cost of an asset up front, a lease requires a relatively small monthly payment, perhaps with a security deposit. For businesses that are short on cash, leasing may be the only way to get needed assets, especially since it's easier to get a lease than a loan.
- To not be locked into technology. Computers, for instance, change rapidly. When you lease an asset, you pay only for the period of time you expect to use it; in many cases, it is easy to upgrade to a new model at little or no additional cost. You don't have to be bothered with selling the equipment when you're done with it; the lessor takes it back and is responsible for it.
- Better assets than you could afford to buy. Since you're only paying for a part of the life of the asset, payments are normally lower than they would be for a loan.
- Tax advantages. Most leases are structured so the entire payment is an immediately deductible expense. If you purchase the asset, you have to capitalise and depreciate the asset, which may mean a slower recovery of your costs.
- Book accounting advantages. If a lease is operating, no liability normally needs to be recorded for the future payments due, and you don't have to pay all the cash up front, which tends to improve your ratios of assets to liabilities.
- Incentives. A lease can include maintenance and other services in a single price. Sometimes the interest rate used for the lease is lower than you would pay for a loan.
- Installation of energy efficient equipment reduces energy bills. Energy savings achieved can effectively cover the cost of the lease. Therefore cost neutral.