Leasing is an attractive form of financing because of its flexibility, which is why approximately one-third of all equipment acquisitions are now financed by leases. Today, over 90% of companies that lease recognize it as an intelligent financing alternative and plan to lease again in the future.
Flexibility: Because a variety of leasing products are available, it is not difficult to structure a lease that will meet individual business needs (cash flow, budget constraints, business cycles, etc.). Additionally, as these needs change, a master lease allows for an upgrade at any point in the lease term. There are also options to include other services, such as shipping and installation, if needed, as well as several choices for equipment disposition at the end of the lease term.
Convenience: Leasing is a more flexible and convenient source of financing than alternate means of capital, such as a new debt or equity issuance, especially with a master lease in place. Further, a lease can provide financing that may not otherwise be permitted by covenants in existing loan agreements. In general, leases do not contain financial covenants. Since leases are usually approved in one or two days, the benefit of the equipment can be realized quickly and without hassle.
Tax Benefit: One of the most obvious benefits is the low cost financing offered by a “true” lease in that the lessor’s tax benefits are passed on to the lessee in the form of reduced payments. If operating losses, loss carry forwards, or alternative minimum tax (AMT) prevents the use of depreciation to reduce taxable income, and the lessee chooses to purchase rather than lease, the tax benefit of depreciation may be lost indefinitely. Alternatively, a direct finance lease allows the lessee to take advantage of all of ownership’s tax benefits through depreciation expenses, which can often be accelerated.
Improved Cash Flow/100 % Financing: While a typical equipment loan requires an initial down payment, leasing requires very little money down – with usually only the first and/or last month’s payment due at the time of lease signing. Since a lease does not require a down payment, it is equivalent to 100 percent financing. This means that cash flow is improved on a present value basis, leaving more cash on hand to invest in other revenue-generating investments.
Off-Balance Sheet Financing: Depending on the lessee’s accounting objectives, a lease can be structured as an operating lease under FASB13 for financial reporting purposes.The lease payments are treated as operating expenses on the Income Statement, allowing for immediate write-off of dollars spent. Additionally, because the lease does not appear as long-term debt and avoids the Balance Sheet entirely, the lessee appears more attractive to traditional lenders when needed.
Fixed Lease Payments: The exact amounts of future payments are known under a predetermined lease schedule, which allows for more accurate capital budgets, cash requirement forecasts, and future expense assessments. This also hedges against potential cost of capital changes and inflation fluctuations.
Improved Return on Assets: An operating lease can have a positive impact on both Return on Assets (ROA) and Return on Equity (ROE), which is especially attractive for companies that place a heavy emphasis on these proxies to evaluate effectiveness and profitability. Many times, this is also true for companies that use Economic Value Added (EVA) as the basis to rate performance.
Upgraded Technology: If the nature of an industry demands the latest technology, an operating lease helps obtain new equipment and conserve cash. Leasing equipment that is expected to depreciate quickly not only reduces the risk of being caught with obsolete assets, but also allows for periodic upgrades to meet the changing needs of business.
Joint Ventures: When tax benefits are not available to one or more of the joint venture partners, either because of the tax situation of one or more of the partners, or because of the way in which the venture is structured, the lessor’s tax benefit of ownership is passed through to the joint venture in the form of lower lease payments.