There are several advantages to leasing your next capital equipment need. Leasing helps business make the right capital allocation choices by removing the pressures of cost from the decision-making process. When there’s no room in the capital budget to buy an asset with cash, lease payments from the operating budget are an attractive alternative.
Better Cash Management
Leasing brings financial peace of mind because you’ll know at the outset exactly what your payments will be for the duration of your lease. Payments are determined at a fixed amount, payable monthly, quarterly, semi-annually or annually. Once established, they remain at that amount, no matter what.
Preserves and/or Expands Your Existing Credit Lines
Rather than drawing down on your existing credit lines, a lease can often be an extension of your available credit lines.
Planned Replacement and Upgrade Schedules
A lease often enables you to replace or upgrade equipment/systems prior to the end of a lease on an orderly, predictable timetable that fits your operating and financing needs. You’re assured of having the most up-to-date equipment/systems, which leads to higher operating efficiencies and added capacity for your operations.
Reduced Risk of Obsolescence
By leasing rather than buying equipment/systems, especially technology and communications equipment, you’ll reduce the possible risk of technological obsolescence. When the lease term expires, you can decide for yourself to keep the equipment/systems you already have or create a replacement schedule to upgrade to the current or the then state of the art technology.
By replacing and upgrading your equipment/systems on a regular basis, you reduce repair and maintenance costs. Productivity rises through better integration of new property and you’ll have less downtime with equipment/systems that operates more efficiently.
Off Balance Sheet Financing
Whether or not a lease appears on the balance sheet depends upon its classification-capital or operating- from the perspective of the lessee and their accountants. If the lease is a capital lease, the lessee is treated as owner of the leased asset from an accounting standpoint. Owned assets will appear as an asset with a corresponding liability on the balance sheet. Leased assets are expensed when the lease is an operating lease. Such leases do not appear on the balance sheet, but rather show up as an operating lease. Such leases do not appear on the balance sheet, but rather show up as an operating expense on the income statement. These assets do not appear on the balance sheet, which can improve financial ratios. Your financial advisor should be consulted to determine the proper accounting treatment of any specific lease transaction.
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