Leasing brings six major advantages, and all directly involve the company’s cash flow.
Essentially, the advantage to leasing over buying is that there’s usually no large outlay of cash at the beginning of the lease as there is with an outright purchase.
100 percent financing: Many business leases come with 100 percent financing terms, which means no money changes hands at the inception of the lease. Well, it’s not totally cash-free, because the lessee has to make the lease payments each month. But many times the assumption is that your company will be making the payments from future cash flows — in other words, from enhanced revenues that you earns because of the lease.
Obsolescence: Another advantage to leasing is working around obsolescence, which means you are able to anticipates frequently replacing the fixed asset. For example, many larger clients lease rather than purchase their camera equipment so they can stay current with new and faster computer processing technology.
Flexibility: Asset flexibility is another leasing advantage. Based on the relationship between the lessor and the lessee, the lease may be for either just a few months or the entire expected life of the asset.
Lower-cost financing: Based on many different variables, you may be able to utilize tax benefits associated with leasing.
Tax advantages: Separate from any tax benefit you may gain, lease payments can reduce taxable income in a more appropriate manner than depreciation expense. Remember that you treat operating leases like rentals by expensing the entire lease payment when the business makes it.
Off-balance-sheet financing: Finally, operating leases provide off-the-books (or balance sheet) financing. In other words, the company’s obligation to pay the lease, which is a liability, doesn’t reflect on the balance sheet. This can affect a financial statement user’s evaluation of how solvent the company is because he will be unaware of the debt—hence the importance of footnotes to financial statements.
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