When it comes to running small businesses and startups, it can be incredibly difficult to find the capital necessary to properly function, often due to cash flow issues. Paying for computers, furniture, software licenses, utilities, and salaries is exceptionally difficult for a new operation, especially during the very earliest stages.
While often harrowing, paying for large expenditures isn’t always impossible, and one of the best ways to work around the issue is to utilize finance leases.
What Is A Finance Lease?
A finance lease is a very useful way for individuals, organizations, or businesses to fund expensive purchases without having a lot of upfront cash or taking the risks of default.
Unlike an outright purchase or a loan where you technically own a piece of property, and it’s paid for by a loan agent, with a lease, you don’t actually own whatever it is that you’re using but instead pay a (usually monthly) fee over a set contract period, similar to renting.
Most, but not all, leasing contracts are multi-phasic, with there being an initial upfront period with a higher monthly charge, followed by an additional period where payments are lowered; a reflection of a piece of capital’s depreciation over time. At the end of a lease period, it’s possible for a lessee to sign a new lease under different terms or potentially outright purchase the now depreciated piece of capital if they so wish.
Leases are typically used for the purchasing of new vehicles, but according to the personal finance service, Lantern by SoFi, they can take the form of many different kinds of financial transactions, such as refinancing a car, buying machinery, or gaining access to software licenses.
What Are The Pros And Cons Of Lease Financing?
Generally speaking, the upsides of lease financing include:
- Leasing is oftentimes cheaper than a loan
- Monthly payments are not tied to interest rates
- If you have bad credit, leases are easier to obtain than borrowing money
- If you’re just starting out, it’s better suited for highly variable cash flow
- Leases can be beneficial for tax purposes
Although there are many benefits to leasing, there are also quite a few downsides as well:
- You (potentially) won’t be able to access your capital’s equity
- You don’t actually own what you are using
- There are limitations on how you can use equipment
- Lessors can repossess property very easily
- Contracts can have sketchy stipulations that are hard to spot
Is Leasing for You?
Figuring out whether you should lease a piece of capital, purchase it with a loan, or outright buy it with your own money can be a challenging process. There are a lot of variables to consider and circumstances can change, potentially making whatever decision you’re making the wrong one.
In general, though, if you’re foreseeing any cash flow problems in the future, then leasing is the way to go.
Author Name: AaronAbbott
