What would be the best option for a company to lease or purchase equipment? Each business owner’s situation is different. The decision to buy or lease business equipment is unique. It must be made on a case-by-case basis. Leasing equipment preserves capital giving the business more flexibility. While leasing can be good in the short run it can cost you more in the long run. We will look at the advantages and disadvantages of leasing. My research will look at the different options a company faces if they lease or buy and why it has become more attractive to lease.
First let’s start by describing the basic concept of a lease. Some leases are merely rentals, whereas others are effectively purchases. FASB classifieds lease as an operating lease or a capital lease. A lease must meet one of the following criteria’s to be considering a capital lease. The lease is greater than 75% of the property’s estimated economic life, the lease contains an option to purchase the property for less than fair market value usually at a bargain price, ownership of the property is transferred to the lessee at the end of the lease term, or the present value of the lease payments exceeds 90% on the fair market value of the property. The lessor transfers the right to use the property to a lessee. Lessor is the finance company and lessee is the person leasing. The lessee makes one-time or periodic payments to the lessor in return for the use of the property. Leased asset can either be tangible property such as a home, office, car, airplane or computer. If you run a business and have to decide to lease or buy here are some benefits of leasing to consider. Less cash up front means conserving capital. A lease can also provide services to the equipment by giving it maintenance. Lease payment terms tend to be longer which makes payment more attractable. The ability to upgrade equipment is a benefit in growing businesses that need to keep up with technology. One advantage of leasing business equipment is that it allows you to acquire assets with minimal down payment or no down payment at all. This is good to your cash flow. The more cash your company shows and has makes it more attractive to its investors. Lessor has certain roles, they are customers to the manufacturers, and they
are customers offering a crucial distribution. Leasing equipment provides the lessee with all the following benefits utilizing the equipment without having to pay the up-front costs or assuming the risk of ownership. A lease is one of the best ways for businesses to stay on top of the development curve. With so many new developments that occur specially in technology areas equipment leasing is less financially expensive. To the airlines they are a more affordable method of supplying what they need. While there continues to be turmoil in the financial markets commercial lenders focus premier on credits and a lot of the airlines won’t qualify to buy an airplanes. That is why leasing has become popular among the airline. The airlines are coming to the conclusion that it might be better for someone else to own the assets. Let’s take into consideration why airlines would lease its commercial jets. When making the decision to buy or to lease the company must consider financial implications and options including the value of the money. Operating leases are for terms shorter than expected life of the aircraft, and the asset typically need not appear on the balance sheet. A capital finance lease covers the useful life of the aircraft. A sale-leaseback arrangement involves purchase of the aircraft and use for a short period of time, followed by sale to the lessor who then leases the aircraft back. Airlines are more increasingly turning to operating leases to bear the risk of a slump. American Airlines is one example of having the flexibility of going bankrupt and tear up leases and return the planes back. While it makes sense for airlines to rent...
References: Earl K.Stice, PhD: Intermediate Accounting:2010,2007 South-Western ,Cengage Learning
The Economist Newspaper: The Economist, 2012,Buy or Rent?
Pam Newman: Entrepreneur :2006 Leasing Vs Buying: Which is Best for You?
Please join StudyMode to read the full document