Advantages and Disadvantages of Lease Financing - QS Study
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Advantages and Disadvantages of Lease Financing

Advantages

The important merits of lease financing are as follows:

(i) It enables the lessee to acquire the asset with a lower investment;

(ii) Simple documentation makes it easier to finance assets;

(iii) Lease rentals paid by the lessee are deductible for computing taxable profits;

(iv) It provides finance without diluting the ownership or control of business;

(v) The lease agreement does not affect the debt raising capacity of an enterprise;

(vi) The risk of obsolescence is borne by the lesser. This allows greater flexibility to the lessee to replace the asset.

Disadvantages

The disadvantagess of lease financing are given as below:

(i) A lease arrangement may impose certain restrictions on the use of assets. For example, it may not allow the lessee to make any alteration or modification in the asset;

(ii) The normal business operations may be affected in case the lease is not renewed;

(iii) It may result in higher payout obligation in case the equipment is not found useful and the lessee opts for premature termination of the lease agreement; and

(iv) The lessee never becomes the owner of the asset. It deprives him of the residual value of the asset.