Benefits and Disadvantages of Leasing

Every organization in the world needs assets for the successful running of the activities they are engaged in and in the process faced with the choice of buying the asset or alternatively leasing it. Buying implies acquiring ownership in the asset and can be defined as “…. obtain ownership of a security or other asset in exchange for money or value.” (Buy, Glossary). Hence, if an organization buys a product, it has full legal rights over it and can retain, transfer or sell it as it deems fit.

Leasing on the other hand does not require a transfer of ownership, but only a right to use an asset or property in exchange for a fixed rent. A lease involves a “legal agreement whereby the lessee uses the real or personal property of the lessor for a rental charge.” (Business Glossary 1999-2008).

There are certain inherent advantages and disadvantages that exist for both leasing or buying of property and an organization will have to make a decision based on the particular circumstance of each case. But on the whole, it would be worthwhile to lease rather than to buy which will be made clear from a brief review of the positives and negatives of both the above transactions. This is especially true for a medium scale organisation like Thai-Lay Fashion. Moreover, the benefits given are common for all types of assets including land and equipment.

Benefits of leasing

1. Lasing can help save capital which can be used for other productive purposes. A purchase would involve upfront payment of a large amount which would be a drain on an organization’s resources.
2. If the leased product is related to technology, the problem of technology obsolescence can be avoided by leasing different equipment in place of the existing one. The only problem to take note of is that it should be incorporated into the lease agreement.
3. Tax deductions are allowed on the leased item and hence companies can claim the same and get the benefit of additional resources.
4. If the cost of debt is high in a particular market leasing would be the preferred alternative.
5. It is equivalent to getting 100% finance for the product without its attending costs.
6. Leasing is more advantageous if the use for the product is short or medium term.
7. The organization can test the viability of a new product or location. If not found feasible, it can be abandoned without heavy losses.

Disadvantages

It is worthwhile to mention a few disadvantages also.

1. The lessee has no ownership or stake in the item leased. Any appreciation in value (e.g. property) will benefit the lessor only.
2. Increase in rent periodically may prove to be costly in the long run.
3. Flexibility in suing the leased item may be curtailed.
4. The clauses in the lease agreement may be more beneficial to the lessor than the lessee. (Ghyoot 2005, P.17).

But on the whole, for a company like Thai-Lay Fashion which is not a large scale concern, the benefits of leasing outweigh the disadvantages. Leasing definitely reduces the risk factor which is definitely an advantage here. The fashion industry is a high risk, high-profit business. A particular fashion may be hit in which case the company stands to have a huge financial benefit. On the other hand, investing a lot and finding the product not being accepted will prove to be the opposite. In such a scenario, the company should preserve its financial resources for such eventualities and should definitely opt for leasing rather than buying its capital requirements.

Bibliography

Buy, Glossary. Stock Trading. Web.

Business Glossary: Lease: Business Definitions. (1999-2008). All Business. Web.

GHYOOT, Valmond President. Prof (2005). Corporate Real Estate: Why Do You Own / Lease Real Estate?. Vol.4. No.5. P.17. Thai Appraisal. Web.