Advantages And Disadvantages Of Leasing

Advantages Of Leasing

Acquisition of long-term assets requires huge cash outlay which is some times quite beyond the financial capacity of the actual user. In such a situation, the user can lease such capital assets. Leasing serves as a long-term funding that can be used for acquisition of capital assets. The advantages of leasing are as follows:

1. Leasing Permits Alternative Uses

A leasing arrangement provides a firm with the use and control over the assets without incurring huge capital expenditure and requiring to make only periodical rental payments. Thus, leasing saves funds for alternative uses.

2. Leasing Arrange Faster And Cheaper Credit

Leasing companies are generally more accommodating than banks and other financial institutes in respect of terms of financing. As such, it has generally been found that acquisition of assets under leasing arrangement is cheaper and faster as compared to acquisition of assets through other sources of financing.

3. Leasing Increases Lessee's Capacity To Borrow

Leasing arrangements enable the lessee to use more of its own funds for working capital purposes instead of using low yielding fixed assets. The debt-equity ratio of lease does not alter because of assets acquired under lease arrangements. As such lease arrangements can resort to further borrowings in case the need arises.

4. Leasing Protects against Obsolescence

Lease arrangements helps to protect the lessee against the risk of obsolescence in respect of the assets which become obsolete at a faster pace.

5. Boon For Small Firm

Acquisition of assets through a leasing arrangement is particularly beneficial to small firms which can not afford to raise their capacity on account of scarcity of financial resources.

6. Absence Of Restrictive Convenience

The financial institution while lending money usually attach several restrictions on the borrowers as regards management, debt-equity norms declaration of dividends etc. Such restrictions are absent in the case of lease financing.

7 Trading On Tax Shield

In case of a non-tax paying lessee, the cost of financing an asset is much higher as compared to a tax-paying lessee. However, when tax-paying owns the assets, he generally passes a part of the tax benefit to the lessee by means of lower rental charge. As a result of this favor, the real cost of the asset to the lessee, work out to be lower than that what it would have been if he were the owner of the assets.

Disadvantages Of Leasing

Major disadvantages of leasing are as follows:

1. Deprived On Ownership

In a leasing arrangement, the lessee does not get the ownership of the asset. it gives only the right to use. As such, the lessee, cannot pledge the asset for securing loan from financial institutions.

2. Deprived Of The Asset IN Case Of Default

In case the lessee makes a default in rental payment, the lessor is entitled to take over the asset and the lessee has no right to prevent him from doing so.