Question

27. What are some advantages of leasing?

Answer 1

WHAT IS A LEASE OR LEASING?

A lease can be said as an arrangement between the lessor (owner of an asset) and the lessee (user of an asset), where the lessor allows the lessee to use his asset in exchange for periodical payments. This is also called lease rentals.

ADVANTAGES OF LEASING:

1. Balanced Cash Outflow

The advantage of leasing is that the payments related to leasing are spread out over a period of time or it may be several years. This helps in saving the burden of one-time significant cash payment. This also helps in maintaining a steady cash-flow profile of a business.

2. Better Usage of Capital

When a company chooses to lease an asset rather than investing it or by purchasing, it may use that capital to fund its other business capital needs. This also helps in making better capital investment decisions with the saved money.

1. Tax Benefit

Payments made towards lease are considered to be operating expenses. Hence, of interest, are tax deductible.

1. Better Planning

The expenses of lease usually remain constant over the asset’s life or the tenor of lease or it may grow in line with inflation. Thus, while undertaking a budgeting exercise, it helps in planning the expense or cash outflow.

1. Low Capital Expenditure

For a newly set-up business, leasing can be an ideal option because of lower initial cost and lower requirements of capital expenditure.