Capital Means The Money Businesses Use To Finance Their Operations Asset Financing: Leasing Over Loans

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Asset Financing: Leasing Over Loans

Asset leasing offers unique alternatives to traditional financing for companies to obtain the equipment needed for their operations. Asset leasing is done as either an operating lease or a capital lease. Each option has its own effect on the company’s balance sheet, but both offer the business additional options for financing the assets needed to expand its business, simplify processes and generate revenue. Usually, financing with a lease is much easier and faster to do than traditional loan financing through a bank.

Operating leases are asset use agreements and do not grant the business entity any ownership rights. Operating leases are more like automobile or apartment leases, where lease payments are made for a set term described in the agreement. The company does not include the equipment as an asset on its balance sheet, in the same way that a tenant cannot include their apartment as their own property.

The benefits of an operating lease are that it can allow businesses to save money on maintenance costs, get new equipment after the term expires, and use assets for projects they might not normally be able to do. For example, a real estate company may use an operating lease for copiers over a two-year term. At the end of the term, the company would not have to worry about re-marketing and selling the used copiers, they can simply be exchanged for new machines. This also avoids the need for increased maintenance costs as the equipment ages, as maintenance/warranty costs can sometimes be included in the lease payments.

Using an operating lease can help a small or new business get what it needs to take on larger projects and hopefully increase revenue. A construction company may choose this to win a bid on a large job, rather than potentially spending tens of thousands of dollars on heavy equipment that can only be used for that particular project. A company could use a short-term lease (perhaps one year) for the equipment needed to complete the job, while paying only a portion of the cost of that machinery.

Capital leases are sometimes called finance leases because they give a business the same ownership rights as financing with a traditional bank loan. Equipment obtained through leasing is recorded as an asset of the company and the balance of the lease is reported as a liability. One of the main benefits of equity leases is that they are easier to obtain than traditional loans and have a variety of payment options. This allows small businesses or start-ups with little or no credit to obtain financing that may not be available through traditional means and flexibility in repayment options. In addition to their registration on the balance sheet, capital leases differ from operating leases in that they typically have longer lease terms.

Capital leases allow businesses with weak or no credit to build their business credit while obtaining the assets needed to expand their operations and increase revenue. At the end of the lease term, the company would have ownership rights to tangible assets that can continue to be used by the company or sold to make money.

These leases may include special financing options to help businesses obtain the assets needed to generate revenue while keeping costs and overhead low. Financing programs, such as 90-day deferred or 90-day same-as-cash, will give a business the option to use equipment and generate revenue for three months before lease payments begin; or an alternative option to purchase the equipment outright and avoid finance charges if capital is available.

Another financing option is the use of residuals, or lump sum payments, which are due at the end of the lease term so that the entity owns the asset. The residual option allows for lower monthly payments over the lease term, making the asset more affordable and therefore deferring the full cost of payment/interest expenses until a later time.

It is not completely uncommon to have an almost customizable payment option on a capital lease. These options are used for specific industries that may experience large changes in revenue over the course of a year, such as seasonal businesses. These options may allow a lower payment, or even no payment, during periods of inactivity in a season and the continuation of the usual amounts from a certain time of the year.

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