Within the past decade, equipment leasing has mushroomed into a multi-billion dollar industry and currently accounts for over one-quarter of all capital expenditures in the United States.
There are five major reasons, or category of reasons why lessees prefer equipment leasing versus a loan for equipment acquisitions.
1) Economic or Financial
2) Financial Reporting
3) Income Taxes
4) Technological
5) Flexibility
Let’s examine each of these more closely.
1) Economical. The economic attributes of an equipment lease can be considerable. The monthly rentals in the lease can be quite low when compared to the loan payments levied by a bank, due primarily to the impact of the residual value in a lease.
The tax benefits alone that are generated in the transaction will influence the lease payments as well. The lessor can lower the equipment lease payments when receiving value from tax benefits, although, the lessor may use tax benefits to increase its yield.
Longer lease terms also help to lower the lessee’s lease payments. The repayment of the equipment cost is spread out over more periods so less payment needs to be charged each period to recover the entire cost.
Equipment leasing also requires little, if any, up-front cash outlays when compared to a bank loan. Many leases require just one payment up front versus the normal down payment requirement on an installment loan for a lessee with a good credit history. The combination of lower up-front and lower subsequent payments helps to preserve working capital.
Additionally, equipment leasing provides the business owner with another source financing, thus allowing them to diversify their funding options.
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