Leasing

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Introduction
Types of Lease
Advantages of Leasing
Disadvantages of Leasng

Leasing, as an investment strategy?, surely leasing should be seen a method of purchasing plant and machinery?. This is not always the case, by freeing up cash through not purchasing equipment in one go, means the money can be used by a business in other ways.

The basic premise of a lease is that it allows for a business to use plant and machinery as it were their own property, however the business has to pay the owner of the plant and machinery a fee for using the equipment.

TYPES OF LEASE

The owner of the plant and machinery is known as the 'Lessor', whilst the business renting the equipment is known as the 'Lessee'.

There are two basic categories of leasing:

FINANCIAL LEASE - Rather difficult to explain, in essence involves the rights of ownership being transferred from say the lessor to the lessee. Financial leases work in the form of contractual arrangements where the lessor will aim to get the cost of the equipment, its resale value, rental costs and interest accrued to be combined into a fixed term/fee arrangement with lessee.

OPERATING LEASE - In essence a rental arrangement, a fee paid for the use of plant and machinery, with no rights of ownership given.

ADVANTAGES OF LEASING

Leasing increases the cash flow of a business, as it allows for equipment to be used without spending prohibitive capital.
Leasing can offer certain tax advantages as the cost of leasing can be declared as an expense on the company accounts thereby it reduces the total amount of net profit which is liable for taxation.
Leasing, in terms of fixed fee payment arrangements can offset the costs of inflation.

DIS-ADVANTAGES OF LEASING

The cost of leasing is often more expensive than outright purchase, as the lessor is in business to make profit from owning plant and machinery.
The leased items will only become business assets if they are purchased outright, they cannot appear as anything other than creditor liabilities on a business balance sheet.

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