Leasing, is gaining more recognition and acceptance worldwide, both as a profitable business to the lessor and effective financing alternative to the lessee. The popularity of leasing is attributable to the various advantages it offers to the principal parties to a leasing transaction.
Leasing is less burdensome on liquidity. This is perhaps the most important reason for using leasing, particularly in a developing country like Nigeria where the means of acquiring productive asset through outright purchase is almost impossible due mainly to high cost. Indeed, there are several other reasons for a lessee’s desire to lease equipment, as opposed to other methods of financing the acquisition of productive assets. These include:
1. Leasing provides additional source of credit to lessees as lessors can have access to financing sources not otherwise available to lessees. While banks, insurance companies, pension funds and other investors may be willing to finance a leasing firm, an individual lessee may not qualify.
2. Working capital is conserved and there is a diversified financing source base, particularly during tight liquidity periods.
3. Leasing as a financing option requires little or no capital outlay by the lessee, which makes it really affordable.
4. Some lease contracts may allow the lessee to expense the periodic rental payments in such a way that the rental expense is greater than the possible depreciation expenses if the equipment were owned. This has a tendency to increase tax-deductible expenses and improve cash flow.
5. As an off-balance sheet financing method, leasing enables a firm to acquire needed productive assets without risking the displeasure of investors in the enforcement of capital budgeting procedures. Thus, the firm’s borrowing capacity may be greatly enhanced. Debt/equity ratios are kept low and a good liquidity picture is presented. Furthermore, leasing as off-balance sheet financing conceals sources of funds from competitors.
6. In sale and leaseback arrangements, lessors appraise the value of the firm’s assets, buy them and then lease them back to the firm, thus releasing the much-needed working capital and cash flow.
7. Since lease contracts are generally written for longer tenor, a lessee is able to stabilise his equipment usage cost over several years. This protects the lessee against rising inflation.
8. Leasing quite often does not go through capital expenditure control and may not be subjected to the close scrutiny often associated with capital expenditure proposals.
9. Leasing also acts as a hedge against stranded, idle and under-utilised assets as well as obsolescence, particularly in an industry that is vulnerable to rapid technological change. Leasing helps the lessee to avoid the risk of obsolescence associated with the leased asset by initially transferring the risk to the lessor. This is a major advantage in cases where the lease is cancelable before the expiration of the lease tenor.
10. Leasing offers the lessee greater flexibility than other forms of asset financing in the structuring of rental payments. Payments can be structured in such a way as to suit the peculiarities of the lessee including his cash flow pattern and any seasonal or cyclical business conditions to which it is exposed. These payments may be level/even, skipped, stepped-up or stepped-down plans that may not be available with other financing alternatives.
11. Lease Financing in Nigeria is often easier to arrange than a conventional term loan in terms of the time and costs involved in negotiating terms and conditions of each financing alternatives.
12. Leasing avoids the corporate overhead expenses charged against the income of a subsidiary based on assets under its control.
13. The present value of the after-tax lease rental payments is usually lower than the cost of purchasing equipment outright, particularly when borrowed funds are used to acquire the equipment.
14. Since lease rentals are generally fixed outflows over the tenor of the lease, a lessee can easily predict the pattern of its cash outflows for budgeting purposes.
15. Leasing relieves the firm of the problem of disposing the asset at the termination or end of the lease. He can simply transfer to the lessor, thus saddling the lessor with the responsibility of disposal.
16. Leasing might be the only feasible method of acquiring the use of assets either because such assets are too expensive, not available for purchase at all or cannot be bought piecemeal. Such assets include earth satellite stations, transmitters or large-scale IT systems. Since a firm really needs only a fraction of the services of this equipment, its best option will be to lease a part for a period of time at a stretch.
17. Leasing relieves the lessee from the tremendous paperwork, delays and efforts associated with shopping around for the right equipment to buy, the most convenient and cheapest source of funding the acquisition and the book-keeping attendant to asset ownership.