Lease Financing for Businesses - Advantages and Disadvantages
One of the most popular trends in the business world in recent years has been to lease finance on items such as equipment. More and more businesses, banks, and other organizations that sell expensive equipment are giving the option to lease their equipment, and many of these organizations also give the option for the lessee to buy the equipment in the end, sometimes for a reduced price. It is important to look over the lease contract paperwork carefully to check the policy on buybacks, information about the monthly payment amount, policies on early termination or returns, and the time periods involved. Leases can be made for different time spans, from as little as one year to as much as five years or more. Like most decisions, making the decision to lease finance has its advantages and disadvantages.
One of the main advantages of leasing equipment is that the lease will not be considered a direct liability for you financially, so if you wanted to lease more equipment or borrow money in the future, the lease would not be held against you. In addition, there are no hidden costs or changing rates - you will have the same payment rate every month, and you will not have to make large payments in the beginning that could possibly put you in debt. Another advantage is the fact that you will not have to constantly purchase new equipment because of the ever-changing technology and constant updating of equipment. Some companies give you the opportunity to trade in the equipment you are leasing for newer equipment when your lease period is over. There are many other advantages such as the potential for tax benefits if you properly structure the lease, optimize your usage of the equipment by only paying for it when you need it, and it is not as difficult to get approval for lease financing as it is to get a business loan. In fact, it will increase your chances of getting loans or leases in the future because it will improve your debt-to-equity and earnings-to-fixed assets ratios.
Unfortunately, where there are advantages, there are also disadvantages. The positive benefits of lease financing often depend on the particular industry and what type of equipment is being leased. One of the most obvious disadvantages of lease financing is that the equipment is not your own and does not give you any equity, unless you decide to purchase the equipment at the end of the lease term. You can use the equipment as you wish but you are responsible for monthly payments, and you may be responsible for equipment maintenance (if it is not included in the lease terms). Depending on the situation, it may be better to purchase equipment rather than leasing it.
In conclusion, it is best to weigh all of your options. Consider first and foremost the type of industry that you are in and the type of equipment that you would be buying or financing via a lease. Would it be easier to buy equipment right out, or would you want to be responsible for consistent payments over a long period of time? All of these factors should be carefully contemplated before making the decision to lease finance or not to lease finance.
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