The activities of buying and leasing are very important for all businesses to adapt. New enterprises must carefully study the importance of managing funds with respect to capital in the form of assets. Established and big business houses may have a different approach from that of smaller start-ups and each is justified with its own pros and cons. When deciding whether to buy or lease a particular piece of business equipment, try to figure out the approximate net cost of that asset.
Hence, the key lies in identifying whether something should be leased or bought.
Leasing refers to part payment in installments for the usage of a certain asset. It involves two parties: the lessor (a person who provides the lease) and the lessee (a person who holds the lease). Leasing does not offer ownership to the lessee (the person who leases).
Advantages of Leasing:
- It lowers the making of upfront payments.
- It provides an income tax break since the tax expenses can be deducted from the companies expenses, as leasing as an activity is a business expense.
- It offers an easier way for a company to get equipment.
- It does not put the user in trouble for using outdated equipment.
- It transfers the maintenance cost of equipment to the leasing company as a part of the contract.
Disadvantages of Leasing:
- It may increase business expenses for several years.
- The cost of interest is very high in the case of leasing.
- The asset reverts back to the owner on the termination of the lease period and the lessor loses their claim on the residual value.
- Leasing is not useful in setting up new projects as the rentals become payable soon after the acquisition of assets.
- The lessor generally leases out assets that are purchased by them with the help of bank credit. In the event of a default made by the lessor in making the payment to the bank, the asset would be seized by the bank, much to the disadvantage of the lessee.
Buying, as many probably already know, refers to complete ownership of a product belonging to an individual or a business organization.
Advantages of Buying:
- Buying business equipment has an obvious advantage of claiming ownership of assets purchased.
- It helps the owner get tax incentives, where taxation charges can be deducted, as buying business equipment is considered an expense of the business firm.
- Buying assets improves the stability of business firms. It improves planning for long-term costs associated with the business.
- It improves the control over assets, which helps to develop, modify and improve overall control of the business firm.
- The decision with regards to the maintenance of assets can be taken by the company itself.
Disadvantages of Buying:
- The fear of equipment getting outdated is present in any business.
- Buying assets instead of renting/ leasing them can be a big investment.
- Maintenance of equipment is the responsibility of the sole owner.
- There is no external support when equipment is bought, as opposed to support from the lessor to the lessee, in case of leasing.
- Buying does not help build business relationships, contrary to that of leasing.
Difference between Buying and Leasing
|Ensures complete ownership
|Only authorizes usage of an asset
|Usually performed in big businesses
|Performed by new businesses or small business houses
|The two parties included in this function are the buyer and seller.
|The two parties included in this function are the lessee and the lessor.
|In case of risk, the buyer is solely accountable.
|In case of risk, the lesser is accountable.
|This activity is included on the asset side of the balance sheet.
|Leasing is a liability for a company and is, hence, recorded on the liability side of the balance sheet.
In conclusion, everything has its pros and cons and every business must make a decision that they deem fit for its situation. A businessperson must consider their financial position before making a decision. The functions of buying and leasing become a backbone of the firm and a major part of the asset ownership and rentals can be managed by the above-mentioned functions. There are no major rules or regulations to be followed when it comes to deciding between the two. Hence, it seems fair to say that this function in any business follows a “to each, their own” policy and depends from one business to another, subject to one’s needs and circumstances.