Leasing and purchasing an asset are two distinct approaches to using an asset for a business. Leasing an asset means that one party owns an asset and rent it to another, under specific terms outlined in a contract (Cheng, 2019). Hence, the party that rents this asset does not own it, unlike when purchasing something, and thus the rights of this party concerning this asset are restricted. As Brigham and Ehrhardt (2017) state, leasing helps support the global operations of multinational companies, with a notable example being Virgin Airlines, who placed an order for ten Airbus aircraft, which were then leased by Virgin from AerCap. In this case, Virgin did not have to pay $2 billion for the airplanes upfront. Instead, the company pays the lessor a fixed sum to be able to use these aircraft. Hence, the first benefit of leasing as opposed to purchasing an asset is the upfront costs that a company has to pay.
These contracts usually require the lessor to service the equipment, meaning that the lessee does not have to worry about the additional costs. Next, the payments for the leased equipment are usually smaller than the actual price of the asset divided by the period of the contract, and the lessor can either renew the lease, lease the asset to someone else, or sell it one the agreement expires (Brigham & Ehrhardt, 2017; “Case study: Equipment leasing vs. purchasing,” n.d.). Finally, lease payments are deductible, if the contract is appropriately arranged according to the Internal Revenue Service standards, which is an additional benefit for the lessee. In general, Brigham and Ehrhardt (2017) argue that the most critical aspect is the use of any asset and not the appearance of it on the firm’s balance sheet. Therefore, when comparing leasing an asset to purchasing an asset, one can argue that leasing is more beneficial than purchasing.
References
Brigham, E. F., & Ehrhardt, M. C. (2017). Financial management: Theory and practice [with MindTap] (15th ed.). Mason, OH: South-Western.
Case study: Equipment leasing vs. purchasing. (n.d.). Web.
Cheng, J. (2019). Lease definition. Web.