Leasing

Firms do not have to own assets (factory premises, furniture, machinery, cars) used in business functioning. 

When a business owns the asset outright, there needs to be a corresponding source of finance on the Balance Sheet - either equity or debt. 

There is no need, however, to weigh down the balance sheet. A business can make use of the asset without having to own it.

Advantages of leasing are:

• Leasing reduces the impact on capital expenditure (transforming inputs of equipment, technology or premises), resulting in less equity / debt financing and higher levels of working capital. This means you can use cash resources on other growth projects and STILL have use of the asset.

• Leasing is a form of long-term debt, but it is not represented on the Balance Sheet. It is recorded as an ongoing expense on the Income Statement. Leasing does lift expenses and 'reduce' profitability, but the advantages of not needing to source large finance (equity or debt) outweigh this.

• Leasing is an expense and is thus tax deductable. Owning an asset does not provide this advantage (although interest paid on loans is also an expense that is tax deductible, as are other items like depreciation).

• Leasing can vastly increase assets used by firm, lifting productivity and profit. A firm might be able to secure the finance to purchase one factory outright - but it might have the financial capacity to lease THREE factories for the same financial impact. This will drastically increase the productive capacity and profitability of the firm.