Merits of Leasing:
Following are the advantages of Leasing:
1. The major advantage of leasing as available to the lessee is that the funds are not tied up in fixed assets. The company at its discretion can more profitably utilize the available resources. It enables the lessee to acquire and use the most modern equipment rather than waiting to mobilize additional resources or raise funds to purchase the same through the time consuming approval and disbursement process of loans.
2. Assets can be leased out at today’s prices rather than at a high price in future caused by inflationary pressures. Payment of rent makes cash flows regular and thus facilitates budget forecasting. The lessee gets 100% financing of the assets. No margin money is required for raising funds through commercial banks and term lending institutions.
3. Even though the ownership of the equipment lies with the lessor, the lessee gets all the benefits of ownership of the assets since the leased equipment is not returned to the lessor under a long term contract and the lessee processes it at a nominal price.
4. The lessor also gets quality equipment under best terms and conditions on behalf of the lessee to its enterprise.
5. Through lease finance, the company can maintain improved profitability and liquidity ratios through increased productivity.
6. Leasing prohibits the company from application of certain asset based on restrictions and thus encourages the growth of the company. It helps to speed up the replacement, expansion, and modernization programs of the existing company. Company facing the problem of working capital deficit and cash flow constraints resorts to the system of lease financing.
7. The lease rentals paid are treated as revenue expenses and derive tax benefits in terms of higher tax saving compared to loans or other methods of financing. Many individual companies raise additional funds through leasing apart from knocking the doors of financial institutions because of the maximum benefits of cash inflows.
8. Leasing is highly flexible to accommodate almost any category of assets, some of which may not either be eligible for depreciation or may not be eligible for the credit from the conventional source.
9. Leasing on a short term basis is more desirable than acquisition of an asset in a rapidly changing field.
10. Leasing may be suitable when a firm needs assets for a short period.
11. Leasing is more flexible ownership, for it is less permanent and makes adjustments possible when the lease expires.
12. In some cases, forms which are either small or have very uncertain records of earnings are able to obtain the use of assets through leasing.
13. Leasing offers certain tax benefits.
14. It also offers a balance sheet advantage and enhances the company’s financial.
Following are the drawbacks of the leasing process:
1. The companies which are not able to borrow from capital market are forced to enter into a leasing arrangement.
2. Leasing does not shift the title of ownership from lessor to lessee.
3. Miscellaneous expenses have often to be borne by the lessee.
4. Certain tax benefits/incentives such as backward area benefits may not be available on leased equipment.
5. Real estate values may increase during the lease period. In this way, the lessee loses the advantage of a potential capital gain.
6. The interest cost of lease financing is generally higher than that of debt financing.
7. Under financial lease, the lessee will not be in a position to terminate the contract except by paying heavy penalties. This may prove to be a handicap for manufacturers when they want to discontinue a particular line of business. In case of owned assets the manufactures can sell the equipment at the time of winding up.
8. The limiting industrial base is a hindrance of financing assets of a company on lease basis.
9. If the lessee is not able to pay rentals regularly, the lessor would suffer a loss.
10. When lease is long term and non-cancellable, there is little chance for the lessee to shift the danger of obsolescence to the lessor.