To put it into the most basic terms lease financing is an agreement with the owner and a third person (usually a business) in which the owner gives the rights to their asset or property in exchange for the right in exchange for a periodic payment. If you really want to understand what lease financing can be and the way it operates and how it works, we’ll certain suggest that you look deeper into the possible benefits and drawbacks of leasing. So, you’ll be aware of what is the difference between a lessee (owner of the property) and a lessor (user for the property) in the lease financing. That’s exactly the topic we’re discussing this moment, so we’ll start with this let’s get started, shall we?
Advantages of Lease Financing
For the Lessor
- steady cash flow: The benefit any lessor is most enthused about is the promise of a steady, uninterrupted stream of revenue. Lease agreements are in place, and the lessee pays regular installments for the duration of the lease is in effect. It is a never-ending source of source of income that is useful to ensure financial stability and plan.
- The Retention of Ownership When you lease out the land the lessor will allow the lessee to keep ownership of the property. This means that even if the leasee uses this land for their own purposes, you have ownership over it as well as any value that is increasing as time passes. Once the lease has ended, you will be able to take back the asset. This means you can either get rid of the asset, as well as lease it out to a different individual again.
- Tax Benefits:There are certain tax advantages to leasing, for instance in the case of a situation where the owner is the owner of the property. This allows one to lower the amount of depreciation that is taxable from one’s revenue, which can be advantageous for those who is in the higher tax bracket. This drastically reduces the tax expense.
- Growth and Lucrative Opportunities: The leasing sector usually generates high returns due to the fact that rental rates are higher than the interest rates on the money for the purchase of the assets. The more people who are into a company that is planning to lease rather than purchase assets, particularly those with tight funds, the greater opportunities are available for increase and development of your company.
For the Lessee
- Capital Savings The lease financing option can save you capital. Instead of making an enormous investment at once for the acquisition and purchase of an asset business is required to make smaller installments to lease. This will ensure that the business can access capital to use for other areas of its operation and at the same time increasing the flexibility and liquidity of the company.
- Off-Balance sheet FinancingAn operational lease does not have be listed on your balance sheet. It enhances certain aspects of your company’s financials like the returns on assets and debt-to equity ratio since it doesn’t appear as a loan, and therefore it appears to be more financial health for an lender or investor.
- Tax BenefitsOften when you are a leasee, lease fees you typically pay could frequently be regarded as business expenses, thus decreasing your tax-deductible income. Tax efficiency is a crucial part of a financial strategy which could lower the value of the asset during the lease term.
- Flexibility and no Obsolescence Risks The leasing option allows for flexibility in financial planning and can be easily managed in relation to budgets. It locks into fixed lease payments, which aids in managing cash flow and forecasting economics. The leasee, as well is accountable for ensuring that the equipment is updated or replacing outdated equipment so that you do not risk the equipment becoming obsolete.
Disadvantages of Lease Financing
For the Lessor
- Fixed Income If inflation rates rise, the regular rent from lease payments may not be as beneficial. Why? Because it’s the same regardless of how much costs rise and can reduce profits.
- Double Taxation Double taxation is a major problem in accordance with your geographical whereabouts around the globe. The first occurs when you buy the asset, while the second one occurs when you lease it out. This can increase the cost of your operation, which can impact the financial outcomes of the business.
- Risk of Damage to Assets: When the lessee is not the owner of the asset they may not take the proper treatment of it and could be at risk of being damaged or deteriorating. The asset will be exposed to greater risk, lower its value and result in higher costs when the asset must be returned to fix up in the future lease.
For the Lessee
- Higher Total Cost: So, leasing might seem appealing initially, but it’s far from real world, because, upon taking all the payments during the lease period it is likely that they will be higher than what you would pay when you purchase the asset particularly for leases with a long term. In the long term, leasing could result in being more expensive than buying the asset in full.
- Flexible and limited control: And with signing an agreement to lease, there are a lot of limitations as well. You are generally not able to make any changes to the product that would allow it to perform exactly how you would like. Are you looking to end the lease sooner than you agreed to? This could be costly. Early termination charges can be significant, binding your hands and reducing your capacity to change operationally.
- Long-Term Commitment Lease agreements usually require you to make a long-term commitment. Particularly in this rapidly changing industry this could cause problems when your company needs to adjustments. This is because, as you can see that being locked into an extended lease could prevent your business from keeping up with changes in the marketplace and trends.
Final Thoughts
Overall the lease financing process can be very beneficial for both the owner of the asset and the lessee, also known as the user for the property. There are however negatives of leasing financing but if you know how to overcome those issues or overcome them and obstacles, then you’re almost certainly on the right track. The whole concept of leasing financing is very popular today because the lessee receives the normal payment for their asset, without placing it on the market for sale and the buyer gets to make use of the asset, without having to pay the full amount of the property or asset.