Table of Contents
In Short
- Advantages of Leasing: Leasing improves cash flow with smaller regular payments, offers tax benefits, and avoids ownership risks like obsolescence or maintenance liabilities.
- Disadvantages of Leasing: Lack of ownership, long-term financial commitments, and potential early termination liabilities can make leasing less favourable in some cases.
- Evaluate Carefully: Weigh the pros and cons of leasing to determine if it aligns with your business’s financial and operational goals.
Tips for Businesses
Leasing equipment can help manage cash flow and access high-quality assets without large upfront costs. However, consider the long-term impact, including financial commitments, lack of ownership, and potential restrictions on borrowing. Ensure lease agreements are clear and factor in termination terms to minimise risks.
As a business owner, you might lease equipment rather than purchase it outright. Leasing equipment, like machinery or vehicles, can be an effective way to save costs. However, equipment leasing has advantages and disadvantages, so it is helpful to be aware of these. This article will explain some advantages and disadvantages of leasing equipment for your business.
Leasing Equipment
Leasing means you pay periodic payments to a lessor for the enjoyment and use of an asset. You may also refer to these payments as lease rentals or minimum lease payments. Once you no longer need to lease an asset, you will usually return it to the lessor unless you can purchase it.
Leasing equipment has several advantages and disadvantages for you as a business – we detail some below.
Advantages of Leasing Equipment
Cashflow
Where you purchase your business items, you often have to pay a lot of money in one go. However, leasing means that you make smaller, regular payments, helping your cash flow over time. Also, knowing what costs to factor into your business can help with future budgeting. Leasing equipment also saves you from borrowing a large amount of money or using up all your business’ cash. The cash you do not use can be valuable elsewhere in your business.
Also, with leasing, you can still get your product almost immediately as if you were to purchase it, as there are few formalities before signing the lease agreement.
Tax Benefits
When you lease assets for your business, you can claim on rental payments, which allows you to gain a tax benefit. However, you cannot lease products if your business is not VAT-registered.
Avoid Ownership Risks
If you choose to lease, you avoid risks associated with ownership. Therefore, if the equipment breaks, it is a risk to the leasing company. Also, as the asset is not yours, you can record it as an off-balance sheet item. This means you can borrow money elsewhere if you need to.
High-Quality Goods
The option of leasing can give you access to better products than if you had bought them outright. The better the product quality often, the more expenses you incur. If you lease the product, you pay the cost over time, allowing you to choose a better product.
Also, if you are in a position to purchase a business product up front, even where you can afford a good quality one, it could become outdated and hence obsolete. With leasing, you avoid the risk of obsolescence, as you do not keep the asset and can sometimes update it by adjusting the rental payment amounts.
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Disadvantages of Leasing Equipment
Lack of Ownership
Although leasing gives you access to a product in exchange for regular payments, you do not own the product at the end of the leasing period. This means you have no equity in it.
However, if you had made those payments through another mechanism, such as a loan, you would own the asset eventually. Sometimes, the amount you pay throughout your lease agreement can be more than the costs if you purchase the item. This is a significant disadvantage of leasing.
Financial Disadvantages
Although leasing may have financial advantages, like regular monthly payments rather than one hefty upfront payment, it has some financial disadvantages, too. For example, the arrangement can burden your business for some time, and you may still have to make a large deposit upfront. If you can terminate the contract, you could incur early termination liability. Also, any equity shareholders in your business will see fewer returns as your lease payment reduces your net business income yet does not give you appreciation in value.
In addition, when you lease a product for your business, you are responsible for the correct use of it and any maintenance costs you may incur. This is a disadvantage as considerable costs could arise for your business.
Loan Opportunities
A disadvantage of leasing is that it may reduce your loan opportunities. This is because a long-term lease is seen as a debt to your business and might affect the lending options for your business.
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Key Takeaways
If you decide to lease equipment for your business, ensure you weigh the advantages and the disadvantages. This will enable you to determine if it is the best option. For example, a benefit of leasing is that you do not need to pay a large sum of money all at once for the item. However, a disadvantage is that you may not wish to be part of a long payment agreement with early termination liabilities.
If you need help understanding the advantages and disadvantages of equipment leasing, our experienced leasing lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
Equipment leasing is an arrangement where a business pays periodic payments to a lessor to use assets like machinery or vehicles without owning them.
Yes, leasing can reduce loan opportunities because a long-term lease is considered a debt, which may impact your creditworthiness for other financing options.
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