Question

How might leasing lead to increased credit availability? Describe some economic factors that might provide an advantage to leasing?

Answer 1

Ans - The economic factors which might provide an advantage to leasing -

1 Less Initial requirement - The initial investment in leasing is not that high as compared to buying a new building or assets. By leasing firm can acquire the asset with the minimum initial investment.

2 Tax advantages- one of the advantages of leasing is lease payment can be reduced as a business expense on the tax return which in turn helps in reducing the net expense to lease the asset.

3 Flexible Terms - Leasing terms and conditions are not rigid and complex as compared when taking loans for buying assets or new machinery.

4 Flexibility to upgrade equipment -Leasing gives the flexibility to businesses to upgrade their equipment when it has become obsolete or outdated. If the lease is used to obtain items that may be outdated in a short time eg computers or tech equipment, the lease may pass the burden on to the lessor.

5 Credit ratings - There is no requirement of credit ratings as such to obtain a lease, therefore it is easy to obtain a lease and in an easy way as compared to buying or purchasing the asset.

6 Asset maintenance cost - Maintenance and repairing cost might not be required and it can increase the cash flow of the business but it depends on the terms and agreements of the business.

Leasing might lead to increased credit availability of the firm in many ways.

1 Many times business leases with 100% financing that means you don't have to put initial investment to purchase an asset which gives the firm to use its money in different resources and can increase the cash flow of the firm for initial years due to less investment which in turn increases the credit availability of the firm

2 Repair and maintenance costs can be cut down which saves the company's money and helps the firm to increase its credit availability but it depends on the agreement.

3 Leasing passes the burden of obsolete equipment on to the lessor which again saves the company's cost.

4 Tax advantages also help the firm to cut the cost of the company.

So all these factors help the firm in a direct or indirect way to save the money which in turn helps the company to have better access to credit.