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Leasing is an appealing and non expensive option for small business owners looking for financing alternatives. Here we present some the negative and positive aspects of this method.
The advantages are:
The reason why most small and medium business owners use leasing is the fact that it increases working capital. The owner also maintains sounder financial statements that will make him/her more attractive to financial institutions in the future. Some banks will not take the risk to give loans to small business and have limited options to buy assets.
Another attractive feature of leasing is its flexibility in terms of timing and the ability to purchase other goods. In general, leasing will allow a company to have more working capital to acquire new and less expensive assets.
A company using this method of financing can increase its savings and the cash flow. This will give the company a wider range of options to use the funding, for one it can invest in sustainable technology and materials. Otherwise, a company has no choice but to resort to bank financing which is not only harder to get but also more expensive. A company can also decide to issue shares for external investors.
Leasing may also reduce the amount of taxable dollars through amortization. Given that the value of a leased piece of machinery is not actually registered as a purchase spending is reduced and within a period maybe smaller than the accelerated depreciation.
The bad news is that tax exemptions or benefits are applicable only if a set of conditions exist:
One condition is for the contract to be for the leasing of machinery or property. The period has to be from 2 to 10 years, the latter for leasing buildings. The leasing contract has to show all considerations related to the property. Additionally, the lessee has to be given the choice of purchase of the equipment.
Some of the disadvantages of leasing are:
The main drawback of leasing is the not getting ownership of the piece of equipment leased when the leasing contract ends. Some leasing contract will not allow the company to purchase the asset at the end of the contract.
Leasing also has a relative cost compared to bank financing. The company leasing the asset may have to pay for the cost of insurance which it would not pay if the bank had financed the purchase.
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