Benefits Or Advantages Of Leasing
The main advantages of leasing can be described as follows:
1. It Promotes Entrepreneurship
While commencing a business it requires huge capital to purchase fixed assets
such as land, building, machinery, plant etc. Leasing resolves this
requirement by providing the right to use asset in exchange for periodic
rental payment. So, leasing promotes entrepreneurship by minimizing initial
cash outlay.
2. It Enhances Liquidity
Leasing saves huge amount of fund which increases liquidity of the firm. Saved
fund can be used to fulfill working capital requirement or can be invested in
other profitable activities.
3. It Provides Tax Benefit
A company can enjoy tax benefit because lease rental payments are operating
expenses and deducted from taxable income. So, leasing saves costs.
4. Convenience Method Of Financing
Leasing is cheaper and convenience than other sources of financing. It does
not require various steps and formalities like borrowing loan from banks and
financial companies.
5. Suitable For Small And New Business
Leasing is beneficial for small and newly established business firms because it
helps to acquire assets without huge capital expenditure and formalities.
6. Provides Protection Against Obsolescence
Another advantage of leasing is that it avoids the risk of obsolescence. Lease agreement is beneficial for lessee (user of asset) because he does not
need to bear the risk of obsolescence during the leasing period.
7. Flexible Source Of Financing
Lease rentals and period can be structured, changed or terminated with the
mutual understanding between lessor and lessee. So, it is flexible than other
sources of long term financing.
8. Not Affected By Inflation
Another notable advantage of leasing is that lease rental is not affected by inflation.
Lessee pays same amount of rental payments till the end of the agreement.
Drawbacks Or Disadvantages Of Leasing
Some of the major disadvantages of leasing can be described as follows:
1. Decreases The Return On Equity
Lease rental is deducted from the net income of the company. So, it reduces
return on the equity shares.
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2. No Ownership
Leasing does not provide ownership of asset to the user (lessee). Such assets
cannot be pledge to obtain loan from banks and financial institutions.
Although lessee is not a owner of the asset, he is responsible for repairing
and maintenance . So, it increases the cost for the company.
4. No Alteration
Another disadvantages of leasing is, user cannot alter the asset in any
situation. If the asset is bought, a company can modify it or make changes to
improve its efficiency. But in case of , assets should not be altered by user.
Pros And Cons Of Leasing In Short
Pros:
- It helps to improve the liquidity of the firm
- It is a convenience, flexible and cheaper method of long term financing
- It saves costs because lease rentals are tax deductible
- It saves the lesser from the risk of obsolescence
Cons:
- It reduces the return of equity shareholders
- It is costlier than debt financing
- Ownership of the asset remains with lessor
