Advice Column
Why Lease?
Leasing should be thought of as an extension of traditional capital resources that, if properly used, can be very beneficial. Common reasons for using leasing is to acquire assets that either depreciate in value quickly or are essential elements to the enterprise that introduce an element of risk, such as technology change, that leave little equity benefit in owning the asset.
The highlights of leasing are,:
Conserves or is an efficient use of Capital – Today, most companies evaluate acquisition of an asset on its contribution to the profit making activities of the business. The simple case of lease versus buy is based on the premise that companies make money by paying to ‘use’ equipment rather than owning. Having cash tied up in fixed assets is no longer considered as default collateral to finance other business activities such as production, inventory, and marketing.
Long Term Fixed Rate Financing – It is generally known that leasing is a higher spread form of financing compared to bank prime rate lending. Fixed lease interest rate financing is not subject to market changes over the term that normally affect prime rates offered by banks. Lease terms can be from 24 to 60 months or more depending on the asset. Lease interest rates are determined at the beginning of the term using Government Bonds plus a margin or spread. This is generally a more accurate method of determining market rates at any point in time.
Asset - Backed Lending - Lease financing transfers ownership of the asset to the lessor. Because the lessor retains ownership of the asset as collateral to the lease obligation, leasing is a much simpler legal process to follow. This also permits more flexibility because lessors require fewer restrictive covenants on the financial health of the lessee. This also permits the lessee to preserve cash and operating bank arrangements to meet working capital requirements.
Flexibility – This is the cornerstone of the leasing industry and its operational advantage over traditional lending practices. Lessors can offer payment structures to match seasonal cash flows, irregular payment intervals, stepped payment plans, mid term equipment upgrades and prepayment privileges. Lessors have a very open accommodating approach to many business financing issues.