When making decisions regarding the acquisition of certain assets in the company, the cost criterion that in reality this will entail to the company in the long term must prevail.
Leasing has several unquantifiable advantages and disadvantages to consider when making a decision between leasing and taking out a loan. Although not all of these advantages and disadvantages are valid in each case, it is not exceptional that several of them are appropriate in a given leasing or acquisition decision.
Advantages of leasing
The main advantages of the lease are the ability that the lessor gives to depreciate the land in an effective way, its effects on financial reasons, its effects on the liquidity of the company, the capacity it provides to the company to obtain financing of 100% of the limited rights of lessors in the event of bankruptcy or reorganization, the fact that the company can avoid assuming the risk of obsolescence and the lack of restrictive agreements.
Financing
Obtaining constant financing can be the starting point for the financial consolidation of the company
Effective depreciation of land
The lease allows the lessee to effectively depreciate the land, which is prohibited in a land purchase. As for tax purposes, the tenant who leases land is allowed to deduct as an expense the total payment of the lease, the effect is the same as if the land were purchased and then depreciated, The greater the amount of land included in a lease, this is made more convenient from the tenant's point of view. However, this advantage is somewhat moderated in that the land generally has residual value for its buyer and not for its tenant.
Effects on financial ratios
Leasing, which is the result of receiving the services of an asset without necessarily increasing the assets or liabilities of the company's balance sheet, tends to disguise the real value of the balance sheet.
However, the accounting principles commission of the American Institute of Public Accountants requires that leases be disclosed in a note to the company statements.
Currently, most analysts are aware of the importance of the lease in the financial situation of the company, and do not consider the financial statements as presented; instead, they make certain adjustments to these statements that more accurately reflect the effect of existing leases on the company's financial position.
Greater liquidity
The use of subsequent sales and lease agreements allows the company to increase its liquidity by converting into cash an existing asset, which can be used as working capital. A company that is short of working capital or in a tight position can sell an asset it owns to a lessor and take the asset out for a specified number of years. Naturally, this operation commits the company to make fixed payments during a determined period of years.
In essence, a lease allows a business to receive the use of an asset for a lower out-of-pocket cost than the cost of a loan.
Consequently, the benefits of the current increase in liquidity are moderated somewhat by the additional fixed financial payments incurred by the lease.
100% financing
Another advantage of leasing is that it offers 100% financing. Most fixed asset acquisition loan agreements require the borrower to pay part of the purchase price as a down payment, as a result the borrower receives only 90 or 95% of the purchase price of the asset.
In the case of a lease, the tenant is not asked to pay any kind of down payment: he only has to make one kind of periodic payments. In essence, a lease allows a business to receive the use of an asset for a lower out-of-pocket cost than the cost of a loan. However, since lease payments are normally made in advance, it is possible to consider the initial payment in advance as a type of initial fee.
Claims limit
When a company files for bankruptcy or reorganizes, the landlords' maximum claim against the corporation is lease payments. If debt is used to acquire an asset, creditors have a right equal to full financing.
Naturally, a property-owned asset may have a scrap value that can be used to meet the company's obligations to its creditors.
Elimination of obligations.
In a lease agreement, the company can avoid assuming the risk of obsolescence if the lessor in fixing the lease payments fails to accurately foresee the obsolescence of the assets or if the lease term is short-term.
Lack of restrictive clauses
A tenant avoids the restrictive covenants that are normally included as part of a long-term loan. The requirements with subsequent financing, minimum working capital, changes in administration, etc; they are not in a lease.
The lack of these restrictive clauses allow the lessee greater flexibility in their operations, this can become a quite important advantage.
