The Advantages Of Leasing Office Equipment
Article by Khathutshelo Nedombeloni | Read more submitted articles here
In Contrast With Buying
Establishing or managing an existing business is more often than not an overwhelming yet exciting undertaking that requires ample resources. Office equipment is one of the essentials of business required when a business commences. Buying and leasing are two main alternatives for acquiring office equipment. The latter being the most sensible option for small businesses or start-ups when acquiring office assets. Primarily a lease is a legally binding long term agreement to rent assets and it requires cautious analysis prior to signing as it is a long term obligation that cannot be cancelled unless it is stipulated in the contract. Conversely there are several benefits related to leasing of office equipment and leasing in general. Leasing assists in reducing start-up costs and "frees" up some cash for other business activities. Furthermore it is cost effective to lease office equipment since the prolonged existence of a new business is not assured and fully purchased equipment can be a huge burden if the business is ineffective. Although a lease can be expensive in the long run, the advantage is that an establishment makes use of office equipment without paying full purchase price upfront. There is also a tax benefit associated with leasing since monthly lease instalments are considered operating costs and an organisation subsequently saves on income tax. Vat is paid with monthly instalments compared to a huge upfront amount required when purchasing outright.
Another advantage of leasing equipment is that a business acquires equipment without the hassle of a deposit or "down payment" and consequently cash flow is rarely affected. Leasing office equipment allows the business owner to spend often limited financial resources on significant spheres of business. Predominantly office equipment is leased to circumvent obsolescence. The advantage is that the moment the equipment becomes obsolete "the lessee" transfers its liability to the owner "the Lessor" and subsequently leases new equipment with the most recent technological innovations. To evade the issue of obsolescence office equipment is often leased on short term lease agreements.
The three most common lease contracts are the financial lease, operating lease and the sale and leaseback. An operating lease allows for cancellation of the lease agreement. This condition is stipulated in the agreement. Office equipment like a computer is often leased under this type of lease. The operating lease is known as a "maintenance" lease since under this agreement the owner of the assets "Lessor" assumes the responsibility of maintaining the equipment during the lease period.
In the sale and leaseback category the asset owner resigns ownership to another person or business by selling it to them and subsequently leases it back to utilise it for a specific period. The initial owner becomes a lessee. This type of agreement allows money “tied up” in an asset for utilization somewhere else in the business. Primarily assets such as buildings are often leased in this manner. Of the three common leases, financial leases are the most prevalent. A financial lease term equals the fiscal existence of an asset. Some of the requirements of financial leases are regular monthly payments and the owner of the asset assumes the responsibility of the equipment the instant the lease period ceases. The disadvantage is that a financial lease cannot be cancelled prior to the end of its term and maintenance of the equipment is the sole responsibility of the Lessee during the lease term.
Leases are often depicted as "net leases or gross leases". Net leases require the lessee to bear the liability of expenses pertaining to insurance, tax and the overall maintenance of the asset whereas the Lessor assumes similar responsibilities under gross lease. Financial leases are typically net leases. Another term used is the “full payout lease” .Under this agreement the owner of an asset recoups the full cost of an asset during the period of the lease term.
Leasing in general has evolved significantly in recent years to become a lucrative business with banks, insurance companies and other financial institutions all providing it. Some of these institutions for instance banks have specific divisions with the sole responsibility to render equipment leasing. These divisions are well equipped to lease almost anything of value.
Buying an asset outright barely has two identifiable benefits. The primary benefit is full ownership of the equipment. This is probable if the life of the equipment is longer and won’t suffer technological obsolescence. Secondly ownership affords competitive advantage since what happens to the asset is the sole responsibility of the owner.
Disadvantages Of Buying
Assets on the balance sheet are documented as a liability if a loan is utilised to acquire a capital asset. The distinctive tax benefit when an asset is purchased outright is merely depreciation.