Leasing companies, as well as banks and some suppliers and vendors, will rent
equipment and other business assets to small businesses. Some manufacturers have
leasing agents who may be able to arrange lease terms or a credit arrangement
with the manufacturer, a subsidiary company, or a specific lessor.
Leasing assets, rather than purchasing them, is a form of financing because
it avoids the large downpayment frequently required for asset purchases and it
frees up funds for other business expenditures. However, you should be aware
that leasing from conventional lenders may be difficult for startup businesses
because traditional lenders require an operating history from prospective
lessees. Among the advantages of leasing are:
- Frees up cash: Many leases require little or no downpayment.
Leasing thereby allows you to direct cash toward other business expenses and
investments. An improved cash position can also help your ongoing ability to
obtain additional debt.
- Less debt appears on your financial statements: In a
straightforward operating lease — in which you rent assets for a set time
period without an ownership interest — neither the leased asset nor the
cost of leasing appear on a balance
sheet. Cash flow and expense-related financial statements will show only
lease amounts as they come due. The relative absence of business debt will
improve your chances for conventional loans.
- Allows more flexibility for equipment changes and upgrades: For
businesses in which rapid technology changes or new equipment is common,
leasing allows you to minimize the costs of purchasing equipment that is
quickly antiquated. Many leasing companies also provide for lease upgrade
options or termination fees. In addition, an option to purchase a leased
asset is usually available if you want to buy the asset at the end of the
- Tax deductible: Leasing costs are deductible expenses that
immediately reduce taxable income. You should compare the benefits of a
lease deduction to the depreciation deduction you would obtain if you
purchased the asset.
- Landlord may help: If you are willing to enter into a long-term
real estate lease for office or plant space, the landlord may be willing to
finance certain improvements to the property that are necessary for your
business. You can pay for these improvements through added rent over the
period of the lease. This arrangement saves up-front cash and equity and
does not impair your financial ratios for other financing.
There are also a number of disadvantages
Because more businesses are using leases, greater creativity in lease terms
and purposes are becoming available. Leases can be drafted so that they resemble
a long-term purchase of capital equipment. The term of the lease approximates
the expected useful life of the asset and the total of lease payments is keyed
to the underlying cost of the asset. The lessee pays insurance and taxes on the
asset. The lessee may either be required to purchase the asset at the end of the
lease, or a purchase option may be available at the end of the lease or for a
stated price during the term of the lease. A service contract can usually be
purchased for an additional charge.
As your ownership options/rights are increased in a lease
agreement, your financial statements may have to show the lease
as an asset purchase, with an accompanying listing of the asset
and a liability for the amount of the "loan." These
changes will negatively affect your debt/equity ratios and your
Sale and leaseback. A derivative form of lease financing, this type of
arrangement requires the borrower to sell valuable, fixed assets, such as
equipment or facilities, to a financier who then leases the asset back to the
seller. The sale generates cash to the small business for short-term needs,
allows continued use of the asset, and creates a tax deduction for rental
expense. A purchase option at the end of the lease period allows the original
owner to reacquire title to the asset at a later date.