Advantages and Disadvantages of Asset Leasing

Asset leasing is a financial arrangement in which one person or business, called the lessee, pays another person, called the lessor, to use an asset the lessor owns. Asset leasing can involve a wide range of assets, including real estate, vehicles, machinery, and equipment.

Different Types of Asset Leasing

There are several different types of asset leasing, including:

• Operating Leases

 Operating leases are short-term leases that generally last for less than the asset’s expected useful life. During the lease term, the lessee is responsible for the asset’s maintenance and upkeep, but the lessor retains ownership. After the lease, the leased asset is returned to the lessor. Frequently, operating leases are utilized for equipment or vehicles that are routinely improved or replaced.

• Finance Leases 

Finance leases, also known as capital leases, transfer most of the risks and rewards of ownership from the lessor to the lessee. The person who rents is in charge of repairs and upkeep of the asset during the lease period, and the lessor retains legal ownership of the asset. However, the lessee can purchase the asset after the lease term for a fixed sum. Finance leases are often used for assets that will be used for an extended time.

• Sales-type Leases 

Sales-type leases, also known as direct financing leases, are structured as a sale of the asset to the lessee, with the lessor retaining legal ownership of the asset. The person who rents is in charge of repairs and upkeep of the asset during the lease period and can purchase the asset after the lease term for a fixed sum. Sales-type leases are often used for assets that will be used for an extended time.

Advantages of Asset Leasing 

There are several advantages of asset leasing, some of them are as follows:

• Allows for the use of expensive assets without a significant upfront cost 

One of the main advantages of asset leasing is that it allows businesses and individuals to access expensive assets without the need for a large upfront payment. This can be particularly useful for small businesses or startups needing more funds to purchase the assets outright. Instead of paying a large upfront sum to purchase the asset, the business can make ongoing lease payments over time. This can help to conserve cash and preserve working capital, which can be used to fund other aspects of the business.

• Offers flexibility in terms of lease length and payment structure

Additionally, asset leasing allows flexibility in terms of lease duration and payment structure. This can be advantageous for organizations that require the usage of an item for a limited time or may require additional finances to make a hefty upfront payment. The lessee and the lessor can negotiate the lease terms to find a payment structure that works best for the business.

• Allows for the use of updated or specialized equipment 

Asset leasing can also allow businesses to access specialized or updated equipment that they may not be able to purchase outright. This can be particularly useful for businesses that use the latest technology or equipment to remain competitive. Instead of purchasing the equipment outright, the business can lease it for some time and then return it or upgrade to newer equipment when the lease period ends.

• It can be tax-deductible for businesses

 Sometimes, the payments made under an asset lease may be tax-deductible for businesses. This can reduce the overall cost of the lease and make it more affordable for the business. It’s essential to keep in mind, however, that the tax implications of leasing an asset might shift based on the specifics of the lease and the asset in question. It is advisable to consult with a tax professional to determine the tax implications of an asset lease.

Disadvantages of Asset Leasing 

There are several disadvantages of asset leasing, some of them are as follows:

• Ongoing lease payments may be higher than the cost of purchasing the asset outright

One potential disadvantage of asset leasing is that the ongoing lease payments may be higher than the cost of purchasing the asset outright. This can make asset leasing less cost-effective over the long term, mainly if the asset will be used for an extended period. To determine the total cost of an asset lease, it is vital to consider the periodic lease payments and any upfront fees, end-of-lease fees, or other costs associated with the lease.

• Limited control over the asset 

When a business leases an asset, it does not have the same control over it as if it owned it outright. Lessor retains title to the asset and has the right to impose usage limitations. For example, the lessor may prohibit the lessee from making any modifications to the asset or using it for specific purposes.

This lack of control can be problematic for businesses that need to use the asset in a specific way or want to change the asset to suit their needs.

• Possible penalties for early termination of the lease

 A business may be subject to penalties or other fees if it decides to terminate a lease early. This can make it difficult for businesses to adjust to changing circumstances or needs. For example, if a business needs to downsize or change the type of equipment it uses, it may not be accessible if it is locked into a long-term lease.

• The leased asset may not become the property of the lessee 

In many cases, the asset leased by a business will not become the lessee’s property at the end of the lease period. This means that the business will not be able to benefit from any asset value appreciation. For example, if a business leases a piece of equipment that increases in value over time, the business will not be able to sell the equipment for a profit when the lease period ends. This can be disadvantageous for businesses that want to build equity in their assets.

• Dependence on the lessor 

When a business leases an asset, it becomes dependent on the lessor for its continued use. If the lessor experiences financial difficulties or goes out of business, it can disrupt operations and potentially lead to costly disruptions.

• Lack of ownership 

As mentioned earlier, the leased asset may not become the lessee’s property at the end of the lease period. This can be disadvantageous for businesses that want to build equity in their assets and use them as collateral for financing.

Conclusion 

In conclusion, asset leasing can be a beneficial financial arrangement for businesses and individuals, offering the ability to access expensive assets without a high upfront cost and flexibility in terms of lease length and payment structure. However, it is essential to carefully consider the potential disadvantages of asset leasing, including the possibility that ongoing lease payments may be higher than the cost of purchasing the asset outright, limited control over the asset, and possible penalties for early termination of the lease. Additionally, the leased asset may not become the lessee’s property at the end of the lease period.

It is advisable to weigh the potential advantages and disadvantages of asset leasing before deciding whether it is the right choice for a particular situation. In some cases, it is more cost-effective to purchase the asset outright. In contrast, in other cases, the flexibility and cost-saving benefits of asset leasing make it a better option. Learn how asset leasing can benefit your business with Bhive. Click here to find out more.