There are many reasons why companies decide to lease equipment rather than taking a loan to buy the asset.

The business reasons why customers prefer to lease rather than borrow to purchase an asset are:

  • No money down and immediate use of the leased asset vs. a loan typically requiring a down payment.
  • Leasing is often 100% tax-deductible as an operational expense under the 179 IRS Tax Code.
  • Avoid using capital to acquire a non-core business asset.
  • Level, flexible, fixed-rate payments over a term that closely match the asset useful life. Terms can be up to 72 months in length.
  • Outsourcing service in a full service lease, such as copiers, is far more cost effective, and easier to manageme.
  • Transfer of asset disposal to the lessor is simple and easy.
  • Convenience: a lease is often point of sale “financing” with a simple, quick process for approval.
  • Leasing provides a hedge against obsolescence.  The company can acquire updated technology easier and quicker allowing them to remain competitive.

The financial reasons why customers would not borrow to purchase an asset are:

  • The customer many not qualify for a loan from a bank.  Leasing can offer a wider credit range for customers than bank financing.
  • The loan interest rate will be floating and may be high.  In addition, the loan fees may be expensive compared to leasing.
  • A down payment may be required
  • The term and loan payments may not fit the customer’s cash management budget. Sometimes this is seen with loans lasting 7-15 years on equipment.
  • Full asset cost is on balance sheet, reducing ROA which is often the basis for compensation and investment evaluation.
  • The loan IS debt which may violate debt covenants.
  • The costs are front ended (imputed interest and straight line depreciation) so you will have higher initial costs as opposed to lower monthly payments that may be easier to budget.
  • Customer is responsible for all maintenance, including costs.  You could potentially be burdened with broken equipment that you can’t return or sell.