Advantages and Disadvantages of Leasing as a Source of Finance
Looking for advantages and disadvantages of Leasing as a Source of Finance?
We have collected some solid points that will help you understand the pros and cons of Leasing as a Source of Finance in detail.
But first, let’s understand the topic:
What is Leasing as a Source of Finance?
Leasing as a source of finance means borrowing something like a car or equipment by paying the owner regularly instead of buying it all at once. It’s like renting for a longer time with the option to own it later.
What are the advantages and disadvantages of Leasing as a Source of Finance
The following are the advantages and disadvantages of Leasing as a Source of Finance:
| Advantages | Disadvantages |
|---|---|
| No upfront purchase cost | Higher long-term cost |
| Preserves working capital | No ownership equity |
| Flexible payment terms | Strict lease terms |
| Off-balance sheet financing | Limited customization options |
| Tax benefits may apply | Potential for lease-specific fees |
Advantages of Leasing as a Source of Finance
- No upfront purchase cost – Leasing lets a business use an asset without paying the full price right away, which helps when funds are limited.
- Preserves working capital – It helps a company keep cash in the business for other needs instead of tying it up in expensive equipment.
- Flexible payment terms – Companies can often choose payment plans that match their cash flow, making budgeting easier.
- Off-balance sheet financing – Leasing can keep debt from appearing on a company’s financial statements, which might make its financial health look better.
- Tax benefits may apply – Depending on local laws, lease payments might be deducted from taxable income, reducing tax bills.
Disadvantages of Leasing as a Source of Finance
- Higher long-term cost – Leasing often ends up being more expensive over time compared to buying an asset outright, due to ongoing payments that can exceed the asset’s value.
- No ownership equity – When you lease, you never actually own the asset, so you don’t build any equity that you could benefit from in the future.
- Strict lease terms – Lease agreements can come with strict rules that might limit how you use the asset, and breaking these rules can result in penalties.
- Limited customization options – Customizing a leased asset is usually not allowed or is very restricted, so you have to use it as is, even if it’s not perfect for your needs.
- Potential for lease-specific fees – You might have to pay extra charges that are specific to leasing, like fees for going over a mileage limit on a leased vehicle.
That’s it.
Also see:
- Advantages and disadvantages of Leasing an Automobile
- Advantages and disadvantages of Leasehold Property
- Advantages and disadvantages of Wind Turbines
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