Leasing is generally more expensive than borrowing to buy, and FASB 13 has reduced the availability...

Leasing is generally more expensive than borrowing to buy, and FASB 13 has reduced the availability of off balance sheet financing. Why then is leasing popular?

Expert Solution

The leasing is more expensive than borrowing because the lessor expects a higher interest rate as compared to the lender.

Following benefits are provided by the lease which makes it a popular and useful mean of using the assets:

No down payment: The lessor does not require any kind of down payment and provides full financing of the asset. However, in the case of borrowing, the lender requires the contribution of the borrower to finance the cost of the asset.
Restrictions: The lender generally restricts the rights of the borrower in the bond indenture. The limitation can vary from the limited selection of the business type, limitation of the dividend payment by the borrower, maintaining a certain financial position. On the other hand, the lease agreement does not have such complicated restrictions.
Easy credit with lessor: Generally, the manufacturers lease their own product. The manufacture would provide the lease to the customers with marginal creditworthiness to place their assets. It would help financially challenged companies to acquire the asset.
No risk of obsolescence: The obsolescence decreases the value of the asset drastically. The lessee has the option to opt-out from the asset at the time of the ending of the lease. The lessee does not necessarily have to take ownership of the asset.
Tax deduction on the land’s cost: The lessee has the option to deduct the total lease payment for the real estate. This option is not available when the person owns the land.
Increase in liquidity: In case of liquidity issues, the company can sell the asset to raise the funds to an institute and lease back the asset from the same institute. It would resolve the liquidity issues and the company would remain using the same asset in the same manner.
Present value factor: The present value factor of the money states that the leasing of the asset is a better option than buying the asset because short funds should be invested in the lease and the remaining should be used for generating returns in the future.

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ekkarill92 answered 1 year ago

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