What Are the Advantages and Disadvantages of Equipment Leasing?

In Short

• Leasing equipment helps manage cash flow, offers tax benefits, and allows businesses to upgrade assets easily.
• Long-term leasing costs may exceed ownership, and lease agreements can include restrictions or early termination fees.
• Carefully review lease terms, compare costs, and consider your business’s long-term needs before deciding.

Tips for Businesses

Before leasing equipment, assess the total cost compared to buying. Check for hidden fees, maintenance responsibilities, and early exit penalties. Leasing can offer flexibility and tax benefits, but long-term costs may add up. Always review lease terms carefully and seek legal or financial advice to ensure it’s the right choice for your business.

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Table of Contents

• Equipment Leasing Advantages
• Equipment Leasing Disadvantages
• How to Lease Equipment
• Key Takeaways
• Frequently Asked Questions

There are several advantages and disadvantages to leasing equipment for a business. Equipment leasing can free up a business’s cash flow and provide a straightforward path to expanding and upgrading assets. It also decreases the risks associated with ownership and the challenges of end-of-term asset disposal. Businesses can also take advantage of potential tax benefits by structuring repayments for leased equipment. This article explores the benefits, drawbacks, and key considerations of equipment leasing.

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Equipment Leasing Advantages

Leasing equipment offers long-term budgeting, tax, and technological advantages. Additionally, businesses lease equipment to reduce company debt, manage maintenance costs, and ensure capital is used effectively. Typically, monthly payments can be lower than those of a traditional loan for purchasing equipment and assets, leading to a reduced impact on a business’s cash flow cash-flow.

Lease payments offer greater certainty, as they are fixed and predictable. Fixed repayments enable better budgeting and help avoid rate fluctuations throughout the lease term. Businesses also favour equipment leasing because lease payments may be tax-deductible. Provided the asset is used to generate assessable income for the business, lease payments may be partially or wholly tax-deductible. Lastly, the option to upgrade equipment can frequently pose a financial burden for a business. With equipment leasing, businesses can avoid technology obsolescence.

Equipment Leasing Disadvantages

While leasing equipment has many advantages, you should also be aware of the disadvantages of opting for leasing instead of owning. When you lease equipment, consider the long-term costs compared to ownership. If you plan to use the equipment over an extended period, it may be more advantageous to own it rather than lease it. Furthermore, leasing appears as a business liability on the balance sheet, which could impact your ability to secure loans and assess the business’s overall value. You should also check for any early termination costs if you lease equipment no longer needed.

Owning equipment allows you to use and modify it freely without the restrictions of a lease. Maintenance disputes may arise over responsibilities, so review the lease carefully to understand who covers repair costs. If obligations are unclear, negotiate terms for clarity. 

How to Lease Equipment

Equipment leasing involves a lender buying and owning the equipment, which is then leased to a business for a predetermined monthly rate over a specified duration. Once the lease ends, the business may purchase the equipment at its fair market value, extend the lease, or return it. Our lawyers can assist you in drafting the necessary lease agreement for equipment.

Key Takeaways

Your options will vary based on the leasing and finance company or financial institution with which your business partners. Available equipment financing solutions encompass finance leases, commercial loans, and commercial hire purchase choices. 

If you need assistance leasing your equipment, our experienced leasing lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 1300 544 755 or visit our membership page. 

Frequently Asked Questions

How does leasing equipment affect business cash flow?

Leasing typically requires lower monthly payments than purchasing, reducing the immediate financial burden and preserving working capital for other expenses or investments.

Are lease payments tax-deductible?

Yes, lease payments may be tax-deductible if the equipment is used to generate business income. Businesses should seek financial advice to understand the specific tax benefits.