But First, Let's Understand What a Lease is...
Before we can discuss why to lease, first we should make sure everyone understands what a lease is. The Financial Accounting Standards Board (FASB), the private organization charged with developing the rules for public accounting for the United States, defines a lease as:
"An agreement conveying the right to use property, plant, or equipment (land or depreciable assets or both) usually for a stated period of time" (FAS-13, para. 1).
Items commonly leased include:
Real Estate (office or store space, a warehouse, a parking lot),
Vehicles (cars, trucks, trailers),
Equipment (copiers, computers, machine tools).
Almost any long-lived asset that you can purchase, you can also lease.
Indeed, some assets are only available by lease; postage meters are one of the most common examples. (We provide a more detailed glossary of leasing terms.)
Businesses lease for several reasons:
To conserve cash. Rather than pay the entire cost of an asset up front, a lease requires a relatively small monthly payment, perhaps with a security deposit. For businesses that are short on cash, leasing may be the only way to get needed assets, especially since it's easier to get a lease than a loan.
To not be locked into technology. Computers, for instance, change rapidly. When you lease an asset, you pay only for the period of time you expect to use it; in many cases, it is easy to upgrade to a new model at little or no additional cost. You don't have to be bothered with selling the equipment when you're done with it; the lessor takes it back and is responsible for it.
Better assets than you could afford to buy. Since you're only paying for a part of the life of the asset, payments are normally lower than they would be for a loan.
Tax advantages. Most leases are structured so the entire payment is an immediately deductible expense. If you purchase the asset, you have to capitalize and depreciate the asset, which may mean a slower recovery of your costs.
Book accounting advantages. If a lease is operating, no liability normally needs to be recorded for the future payments due, and you don't have to pay all the cash up front, which tends to improve your ratios of assets to liabilities.
Incentives. Some leases include maintenance and other services in a single price. Sometimes the interest rate used for the lease is lower than you would pay for a loan, because the manufacturer is trying to encourage leasing.
Leasing is not the best choice for everyone.
Sometimes the interest rate used for the lease is much higher than you would pay on a loan. You may be able to use an asset considerably longer if you bought it, so you would save considerable money in later years. (This is especially true for automobiles; you pay much more for transportation if you get a new car every three years, whether you lease or buy, although leasing may be better if you like to always have a new car.) The tax advantages may not be as important in your own situation, based on expenses and revenues you have. Determining whether leasing or buying is a smarter choice can be a complex matter. Financial Computer Systems offers a lease vs. buy module to both our PC product, EZ13TM, and our full-featured lease accounting service.