To Lease Or Not To Lease?

Pros And Cons

Advantages:

  • Most lessors agree to 100 percent financing, which leaves your working capital and lines of credit free.
  • Easy acceptance with quicker and more liberal credit approval and less paperwork than applying for a bank loan.
  • Equipment upgrades, usually at no extra cost.
  • Reduced risk of technological obsolescence.
  • Major tax benefits because most lease payments may be counted as operating expenses and deducted as such each month throughout the tax year instead of annually.
  • No down payment or collateral required.
  • No variable interest rates that are affected by the fluctuations of the market.
  • Some lessors permit flexible payment schedules if your business is seasonal.
  • An option to buy at the end of a lease gives you the opportunity to decide whether your business strategy still requires the same equipment or whether you should move on to other merchandise.
  • Unless you sign a finance lease (see the "What's Your Type?" section above), your lease payments are not listed as a liability on your balance sheet, so your financial picture looks brighter.

Disadvantages:

  • You do not own the equipment and cannot sell it unless you opt for a buyout.
  • A long-term lease can lock you into equipment you no longer need.
  • You may prefer to consolidate with a single bank loan to cover all your office expenses instead of several different payment plans.
  • There may be penalties for terminating a lease.
  • Leasing debts can stress some people out; after all, you're borrowing money.
  • If service is poor, you have little recourse.
  • Equipment insurance is usually not included.

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This article was originally published in the February 1998 print edition of Entrepreneur with the headline: To Lease Or Not To Lease?.

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