Leasing Vs Purchase

Lease financing in India is a prominent financial tool through which businesses acquire assets or equipment without significant, immediate upfront investments.

What Is Lease Financing?

Lease financing involves entering an agreement where a lessor (the asset owner) allows a lessee (the business or individual) to use the asset in exchange for recurring payments. This arrangement will enable businesses to access assets they need to operate or expand their operations without the burden of purchasing them outright.

Both lease financing forms, operating or finance leases, allow businesses to use assets for a specific period without purchasing them. The lease can be short-term or long-term, depending on the business requirements.

Advantages Of Lease Financing

Leasing offers numerous advantages that can significantly benefit businesses across various industries. Some of these are as follows:

Flexibility: Lease agreements offer flexibility to accommodate changing business needs. Businesses can easily upgrade or add equipment during the lease term, allowing them to adapt to market demands and technological advancements without ownership constraints.

Capital Conservation: Leasing allows businesses to save capital outlay by avoiding sizeable upfront cash outflows. This enables them to allocate their financial resources toward core operations, expansion, or other investment opportunities.

Tax Benefits: Lease payments in India are typically treated as operating expenses, making them potentially tax-deductible. This can result in tax savings for businesses, improving their financial position.

Purchase

Purchasing is the immediate alternative to leasing. Purchasing involves buying assets or equipment. When a business chooses to purchase, it takes ownership and bears the total asset cost. While purchasing requires a significant initial investment, it comes with its own set of advantages.

Advantages Of Purchasing

The following advantages make purchasing an appealing option for businesses seeking ownership, control, and the potential for long-term cost savings:

Ownership: Purchasing provides businesses with complete control and ownership of an asset. They can control how the assets are used, modified, or disposed of, providing greater autonomy and flexibility. This is particularly advantageous for long-term investments or when the asset's use can extend beyond its economic life.

Long-term Cost Savings: When businesses purchase assets, they eliminate ongoing lease payments. Over the asset's lifespan, this can result in potential long-term cost savings compared to continuous lease payments. Additionally, ownership allows businesses to generate cash through asset resale or leasing after they are no longer needed, further enhancing cost savings. Businesses can also claim depreciation on purchased assets as a tax deduction.

Factors To Consider When Investing In Lease Financing

When considering Lease financing as an investment option, assessing various factors that can impact your financial decision is crucial. By carefully evaluating these factors, businesses can make informed choices that align with their needs and goals. Some of key factors are as follows:-

Financial Consideration

Cost Analysis: Compare the total cost of leasing versus purchasing. Assess lease payments, interest rates, fees, and the financial impact on cash flow and profitability.

Tax Implications: Understand the tax deductions and benefits associated with leasing to optimize tax advantages.

Budgetary Considerations: Evaluate the impact of lease payments on monthly cash outflow, working capital, liquidity, and the potential return on investment (ROI) from leasing.

Business Needs And Growth Plans

Alignment With Business Objectives: Evaluate how lease financing supports the company's goals and fits into overall business strategies.

Scalability And Flexibility: Assess the flexibility of lease agreements to adapt to changing needs. Consider upgrading or adding equipment during the lease term and evaluate the ease of terminating or extending the lease agreement.

Impact On Business Operations And Expansion: Analyze the effect of lease financing on day-to-day operations, production capacity, efficiency, and the ability to respond to market demands.

Industry-Specific Considerations

Industry-specific lease financing solutions tailored to specific sectors, such as fleet management or equipment leasing. Understand the benefits and challenges specific to the industry and evaluate the availability of specialized lessors or lease providers.

Maintenance And Service Requirements: Evaluate the maintenance and service responsibilities under the lease. Assess the quality and availability of service support from lessors along with the leased assets' reliability.

Regulatory And Compliance Factors:

Understand industry-specific regulations related to India’s lease financing landscape. Ensure compliance with legal requirements and standards. Assess the potential impact of regulatory changes on lease agreements and factor in any compliance costs.

Risk Assessment

Asset Value And Condition: Evaluate the value and condition of the leased asset throughout the lease term. Consider factors such as maintenance requirements, potential obsolescence, unexpected expenses, or the need for an early replacement.

Lessee/Lessor Relationship: Evaluate the lessor's reputation, credibility, and financial stability. Consider their track record of providing reliable assets, timely support, and adherence to contractual obligations. Assess the risk of disruptions or complications from an unreliable lessor.

Lease financing offers businesses a flexible and advantageous approach to acquiring assets and equipment. By understanding the advantages and drawbacks of lease financing and purchasing, businesses can make informed decisions that align with their financial circumstances, growth objectives, and industry-specific requirements.        

?Pros and cons of leasing

• Leasing frees up your capital?for other, more important, purchases.
• Leasing gives you access to?the latest and greatest equipment, as and when it becomes available on the market.
• The leasing supplier often carries out any services or repairs that are required, meaning future costs are predictable and you don’t have to worry when things go wrong with the asset.
• The downside to leasing is you don’t actually own the asset. If you find yourself requiring the item again in the future, leasing can end up costing your company more in the long run.

Tax implications of buying

Purchasing will give you access to the following tax deductions:

• Depreciation on the value of the Assets. This is split over the life of the assets, which typically provides a better upfront benefit. However, the benefits of this diminish over time.
• Running costs such as repairs and maintenance, insurances, registration, fuel etc.
• Interest on the loan.

Tax implications of leasing

Leasing gives you access to the following tax deductions:

• The recurring lease repayments made.
• Running costs such as repairs and maintenance, insurances, registration, fuel etc.

Pros and cons of Purchase

• If the asset in question is for long-term use, typically purchase tends to be the cheapest option when it comes to out-of-pocket expenses.
• Purchasing may be the better option for you if your business has the sufficient funds available to pay outright without interfering with your other financial obligations.
• There is often room for flexible payment options when purchasing a product, such as bank loans or repayments.
• Having ownership over an asset with a value that is predicted to rise can offer a great investment opportunity.
• If your are purchasing a depreciating asset, it is worth thinking about just how much you are going to actually use it. If it’s had very little benefit to you over the years, you could end up wasting a lot of money when it comes to selling it further down the line.
• If you do decide to purchase the asset through the assistance of a loan, you also need to take into consideration any additional costs such as interest rates, fees etc.

Leasing is generally more beneficial in splitting your tax deductions evenly over the life of the lease.?Unlike depreciation, you tend to find the deductions stay constant year on year.? However, you don’t get the big upfront benefits. 

Essentially, the lease vs. Purchase analysis is all about capital planning. Once you have calculated the after-tax value of each financial alternative, you will typically find one solution to be more beneficial for you and your company.