Advantages of Leasing
Lessee
 100% financing at fixed cost; i.e. payment
rate is ‘locked in’; if a loan, may be
subject to a floating interest rate
 Leases often signed without money down
(i.e. deposit) from the lessee; helps
lessee conserve cash (cash important
and often scarce for SMEs and start-ups)
 Lease payments often fixed; so lessee
protected against inflation; predictability,
enables planning
 Protection against obsolescence:
 Risk of residual value passed to lessor;
e.g. a company that leases computers
may be allowed to return old computers to
the lessor for newer models any time
during the lease, cancelling the old lease
and writing a new one
 A good idea if the nature of lessee’s
business requires the use of latest model
of computers
 Flexibility:
 Lease agreements may contain less
restrictive provisions than other forms of
financing, e.g. debt agreements; also,
debt covenants cannot be violated,
otherwise the lender may recall the entire
loan
 Innovative lessors may tailor leases to
meet a lessee’s specific needs, e.g. in
terms of duration and the amount of rental
payments throughout the lease term
 Less costly financing:
 Some companies may find leasing less
expensive than other forms of financing,
for example getting a loan; e.g.
companies that are already in low tax
brackets may lease to claim tax benefits,
as certain expenses may be offset by
allowable deductions
Lessor
 Often provides profitable interest margins
 Lessor will at least recover the fair value of
the underlying asset of the lease, plus the
cost of financing, and a profit margin that is
acceptable to the company
 May stimulate sales of a lessor’s products;
lessor may be a dealer or a manufacturer.
 Leasing is popular in the market of motor
vehicles (cars), aeroplanes, as well as
equipment and machineries.
 Often provides tax benefits to various
parties
 E.g. Airbus may sell a plane to a wealthy
investor (same country of residency as
Airbus) who does not need a plane but
could use the tax benefit; the investor (i.e.
lessor) may lease the plane to a foreign
airline, to which the tax benefit would be of
no use (since the airline is foreign thus not
a tax resident)
 Everyone gains: Airbus sells its planes, the
investor receives the tax benefit, and the
foreign airline receives a lower rental rate
as the lessor is able to use the tax benefit
 It may provide a high residual value to the
lessor upon the return of the property at the
end of the lease term to the lessor
 Residual values may provide large profits,
but that is not a guarantee
 E.g. rising petrol prices (or other macro-
economic factors) may lead to a huge
decline in the resale values of leased motor
vehicles.