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.