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What are the advantage and Disadvantage of Leasing

Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 ROSHNI asked about 3 years ago

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4 Answers
Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 CA Sandeep Bohra answered almost 3 years ago

Dear friend, Following are the advantages & disadvantages of Leasing :- Advantages of Leasing :- Balanced Cash Outflow: The biggest advantage of leasing is that cash outflow or payments related to leasing are spread out over several years, hence saving the burden of one-time significant cash payment. This helps a business to maintain steady cash-flow profile. Quality Assets: While leasing an asset, the ownership of the asset still lies with the lessor whereas the lessee just pays rental expense. Given this agreement, it becomes plausible for a business to invest in good quality assets which might look unaffordable or expensive otherwise. Better Usage of Capital: Given that a company chooses leasing over investing in an asset by purchasing, it releases capital for the business to fund its other capital needs or to save money for better capital investment decision Tax Benefit: Leasing expense or lease payments are considered as operating expenses, and hence, like interest, are tax deductible. Off-Balance Sheet Debt: Although lease expenses get the same treatment as that of interest expense, the lease itself is treated differently from debt. Leasing is classified as an off-balance sheet debt and doesn’t appear on company’s balance sheet. Disadvantages of Leasing :- Lease Expenses: Lease payments are treated as expenses rather than as equity payments towards an asset. Limited Financial Benefits: If paying lease payments towards a land, the business cannot benefit from any appreciation in the value of the land. Long-term lease agreement also remains a burden on the business as the agreement is locked and the expenses for several years are fixed. In case when the use of asset does not serve the requirement after some years, lease payments become a burden. Reduced Return for Equity Holders: Given that lease expenses reduce the net income without any appreciation in value, it means limited returns or reduced returns for an equity shareholder. In such case, the objective of wealth maximization for shareholders is not achieved. Debt: Although lease doesn’t appear on the balance sheet of a company, investors still consider long-term lease as debt and adjust their valuation of a business to include leases. Limited Access of Other Loans: Given that investors treat long-term leases as debt, it might become difficult for a business to tap capital markets and raise further loans or other forms of debt from th

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Avatar 37a3bd7bc7328f0ead2c0f6f635dddf60615e676e6b4ddf964144012e529de45 veeru answered about 3 years ago

(i) Flexibility (ii) 100% Financing (iii) Timely & Easy Availability of Finance (iv) Simple Documentation (v) Safeguarded Against the Risk of Obsolescence (vi) Does not affect the Borrowing Capacity (vii) Off the Balance Sheet Financing (viii) Sale and Lease Back’ Arrangement (ix) Piecemeal Financing (x) Tax Benefits

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Data?1494421730 rohit awasthi answered about 3 years ago

Hello Roshni > Advantage and Disadvantage of Leasing Advantages of Leasing (i) Flexibility (ii) 100% Financing (iii) Timely & Easy Availability of Finance (iv) Simple Documentation (v) Safeguarded Against the Risk of Obsolescence (vi) Does not affect the Borrowing Capacity (vii) Off the Balance Sheet Financing (viii) Sale and Lease Back’ Arrangement (ix) Piecemeal Financing (x) Tax Benefits Disadvantage of Leasing (i) The lease rentals become payable soon after the acquisition of assets and no moratorium period is permissible as in case of term loans from financial institutions. (ii) The seller’s warranties for satisfactory operation of the leased assets may sometimes not be available to lessee. (iii) Default in payment by the lessor may sometimes result in seizure of assets by banks causing loss to the lessee. (iv) Lease financing has a very high cost of interest as compared to interest charged on term loans by financial institutions/ (v) Restriction on Use : The Lessor generally imposes certain restrictions on the leased assets. The Lessee may not be permitted to make addition on alterations to suit his needs. Thanks

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Picsjoin 2017224123730582 Archana answered about 3 years ago

Hie Roshni, **Following are the advantages & disadvantages of Leasing :-** **Advantages of Leasing :-** 1. Balanced Cash Outflow: The biggest advantage of leasing is that cash outflow or payments related to leasing are spread out over several years, hence saving the burden of one-time significant cash payment. This helps a business to maintain steady cash-flow profile. 2. Quality Assets: While leasing an asset, the ownership of the asset still lies with the lessor whereas the lessee just pays rental expense. Given this agreement, it becomes plausible for a business to invest in good quality assets which might look unaffordable or expensive otherwise. 3. Better Usage of Capital: Given that a company chooses leasing over investing in an asset by purchasing, it releases capital for the business to fund its other capital needs or to save money for better capital investment decision 4. Tax Benefit: Leasing expense or lease payments are considered as operating expenses, and hence, like interest, are tax deductible. 5. Off-Balance Sheet Debt: Although lease expenses get the same treatment as that of interest expense, the lease itself is treated differently from debt. Leasing is classified as an off-balance sheet debt and doesn’t appear on company’s balance sheet. **Disadvantages of Leasing :-** 1. Lease Expenses: Lease payments are treated as expenses rather than as equity payments towards an asset. 2. Limited Financial Benefits: If paying lease payments towards a land, the business cannot benefit from any appreciation in the value of the land. Long-term lease agreement also remains a burden on the business as the agreement is locked and the expenses for several years are fixed. In case when the use of asset does not serve the requirement after some years, lease payments become a burden. 3. Reduced Return for Equity Holders: Given that lease expenses reduce the net income without any appreciation in value, it means limited returns or reduced returns for an equity shareholder. In such case, the objective of wealth maximization for shareholders is not achieved. 4. Debt: Although lease doesn’t appear on the balance sheet of a company, investors still consider long-term lease as debt and adjust their valuation of a business to include leases. 5. Limited Access of Other Loans: Given that investors treat long-term leases as debt, it might become difficult for a business to tap capital markets and raise further loans or other forms of debt from the market.

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