LEASE

CS Shirish Bhootra
Sep 17, 2022
2 min read

Written by CS, Shirish Bhootra

Introduction:

Operating a business is not an easy task. It involves management of people and day-to-day operations, which include but are not limited to products and cash flow, rent of office premises or storehouse or warehouse for storage or supply, and equipment needed for business operations. All these require money and other little things related thereto like expenditure analysis etc.

The business equipment should be productive and make staff more efficient. Any equipment, may it be laptops for staff or lifts for staff have a lasting effect on business. So it has to be taken into consideration whether this equipment should be purchased or should be acquired from the owner on lease.

Leasing:

Leasing is mostly used by new start-ups that do not have enough funds for investment at an initial stage. Even if they have funds, they know it’s better to hold off on large expenditures until they break even, taking into consideration the company’s future techno needs.

Leasing allows enterprises to upgrade technology after the termination of the lease. Consequently, enterprises are upgraded with the latest technology at minimal costs, which otherwise would have required huge capital expenditure in case assets were purchased.

Leasing Pros:

Tax Deduction: Lease rent is an item allowed for a tax deduction.
Low Up-Front Costs: Leasing is the best option for enterprises that are concerned with negative cash flow as there is less cash flow in leasing as compared to buying an asset.
No Maintenance Costs: Maintenance cost attached with equipment is to be borne by the owner of the asset i.e, the lessor, not the person who is using the asset, i.e., the lessee.

Leasing Cons:

High Total Cost: The cost of leasing an asset is usually high as compared to the purchase price of an asset over time.
No Equity: Since there is o ownership in the case of the lease of an asset, there is no equity or freedom to sell the equipment to set off the cost of the asset.
Unfavourable Terms: Agreements related to leases are strict in nature, and there is a lock-in period with respect to clauses mentioned therein.

Factors to be Considered for the Lease of Capital Assets:

Selection between a lease or buying an asset is not as simple as flipping a coin. It is a crucial decision for every business as it has a lasting effect on the operation as well as the financial structure of the business. Many factors have to be taken into consideration. A few of them are as follows:

1. Current and future requirements of the business.

2. Various financing options available.

3. Tax benefits available.

4. Cost associated like maintenance etc.

Conclusion:

There is no one-step solution for buying or leasing equipment all depends on the company’s financial as well as operational structure. It’s a crucial decision having a lasting effect, so it should be considered wisely.

Reference:

Eddy Hood. (2022). Bookkeeping Services Debate: Should Your Business Buy or Lease Equipment? retrieved from Bookkeeping Services Debate: Should Your Business Buy or Lease Equipment? (ignitespot.com)

To know more about leasing an asset or to have an analysis of an asset in terms of future cash flows, feel free to connect with Shweta Consultancy Services.