Advantages and Disadvantages of Lease Financing for Businesses

It has become increasingly more common in recent years for companies to lease equipment. Each leasing agreement needs to be read through carefully to understand the terms and conditions within said

Typically a lease can run anywhere from one to five years. Most equipment necessary in commercial businesses today, including technical equipment, can be leased. Some leases provide an option to then purchase the equipment at substantially less money when at the end of the term of the lease. By leasing equipment, if structured properly, you can maintain your credit availability, as the lease debt does not have to be considered a direct liability on your financial statements. This is advantageous, as it does not limit your ability to borrow from lending sources.

Advantages of lease financing:

• It offers fixed rate financing; you pay at the same rate monthly.
• Leasing is inflation friendly. As the costs go up over five years, you still pay the same rate as when you began the lease, therefore making your dollar stretch farther. (In addition, the lease is not connected to the success of the business. Therefore, no matter how well the business does, the lease rate never changes.)
• There is less upfront cash outlay; you do not need to make large cash payments for the purchase of needed equipment.
• Leasing better utilizes equipment; you lease and pay for equipment only for the time you need it.
• There is typically an option to buy equipment at end of lease term.
• You can keep upgrading; as new equipment becomes available you can upgrade to the latest models each time your lease ends.
• Typically, it is easier to obtain lease financing than loans from commercial lenders.
• It offers potential tax benefits depending on how the lease is structured.