LEASING

Purchase versus Lease

Advantages of Auto Leasing

Auto leasing is becoming a preferred solution to resolve fixed asset requirements vs. purchasing the asset. While evaluating this investment, it is essential for the owner of the capital to understand whether leasing would yield better returns on capital or not. 

What is Leasing?

A famous quote by Donald B. Grant says: 

“Why own a cow when the milk is so cheap?  All you need is the milk and not the cow.” 

We can compare milk as the rights to use the asset and the cow being the asset itself.

 

Avoid Ownership and Thereby Avoiding Risks of Ownership

Ownership is avoided to avoid the investment of money into the asset. It indirectly keeps the leverage low and hence opportunities of borrowing money remain open for the individual and the company. A lease is an off-balance sheet item.

Balanced Cash Outflow

The biggest advantage of leasing is that cash outflow or payments related to leasing are spread out over several years, hence saving the burden of a one-time significant cash payment. This helps a business to maintain a steady cash-flow profile.

Better Usage of Capital

Given that a company chooses to lease over owning the asset, it releases capital for the business to fund other capital needs or invest in more value added opportunities with better returns on capital.

Off-Balance Sheet Debt

Although lease expenses get the same treatment as that of interest expense, the lease itself is treated differently from debt.  Leasing is classified as an off-balance sheet debt and doesn’t appear on company’s balance sheet.

Better Planning

Lease expenses usually remain constant over the asset’s life or lease period. This increased visibility improves expense and cash flow forecasting when undertaking a budgeting exercise.

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