Question

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I think that for a small corporation the biggest advantage of leasing is that cash outflow or payments related to leasing are spread out over several years, hence saving the burden of one-time significant cash payment. This helps a business to maintain a steady cash-flow profile. Also, the ownership of the asset still lies with the lessor whereas the lessee just pays the rental expense. Given this agreement, it becomes plausible for a business to invest in good quality assets which might look unaffordable or expensive otherwise.It releases capital for the business to fund its other capital needs or to save money for a better capital investment decision and lease payments are considered as operating expenses, and hence, of interest, are tax deductible.

I personally not a big fun of leasing, I think the leasing cost of a car for example is ridiculous, but I understand that for a small corporation leasing could be a smart option in the beginning.

Answer 1

- For a lease, it becomes imperative to compare the present value of all the cash outflows(net of tax) with the current prevaling purchase price in market. Sometimes, the total lease premium may be significantly high as compared to purchase prices which may not make lease always a good or favourable option.

- Yes, It is true that With leasing , Corporate gets the opportunity to put its capital in other alternatives but it comes with an opportunity cost i.e. excess lease premium or interest charges paid which should be taken care of for further business investment decisions.

In nutshell, Leasing can be a good option for small corporations in a way to fund easily at initial stage and Pay as you earn (i.e. lease premium) for some begnning period. But calculations should be made and always the best alternative be chosen.