By: Lane Batson
Accounting and Finance scholars state there are three areas to consider when determining whether to lease or borrow money to purchase equipment.
1: Are there potential tax advantages?
2: Will the equipment’s technology become obsolete?
3: Can leasing be type of off balance sheet financing?
To determine whether it is advantageous for your company to lease or purchase you should answer the above three questions while keeping your cash position and strategy in mind. Once you have determined to lease equipment you will need to decide if you are entering a capital or operating lease. In a capital lease your accountants will treat the lease as if the firm has purchase the asset. That will mean that you will not be able to take the benefit of off balance sheet financing. The asset and debt will be recorded on the firm’s balance sheet. In an operation lease neither the acquired asset nor its long-term debt is recorded on the firm’s balance sheet. An operating lease allows a firm to take advantage of off balance sheet financing.