Question

Question I – Lease Financing

The legal definition of "small business" varies by country and by industry. In the United States, the Small Business Administration establishes small business size standards on an industry-by-industry basis, but generally specifies a small business as having fewer than five hundred employees for manufacturing businesses and less than $7.5 million in annual receipts for most non-manufacturing businesses.

Please explain why leasing as a capital financing alternative is an advantage for small business.

Answer 1

Lease finance is favored by small business enterprises (SME), and individuals, where cash flow is the lifeblood of the firm. A monthly payment, even with interest attached, is often the better option than using cash to purchase capital items. It allows the lessee to purchase an expensive item or capitalize the business over a period, thus alleviating the necessity of finding a significant amount of upfront cash.

-Benefits

• A lease contract is often worked over a longer period than a bank loan
• Cash Flow for business, especially a start-up will not be affected by massive outlay for CapEx
• Lease payments are tax deductible business expense
• It is easier to get leasing finance with poor credit rating
• Leasing terms are lower than using another form of capital financing
• Lease companies offer flexible terms, such as closed end and open end leases, and balloon payments, etc.