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Leasing Decisions’ Effect on Financial Leverage Essay

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Introduction

The rules and laws of renting for commercial purposes are not always clear. Many small details can be misleading if people ignore them. Many types of leases have emerged, including operating and financial ones. Many studies analyze and compare different ways to rent a product or space to find the best solution for a business. These studies can significantly help managers in making decisions. Studying the basic concepts of leasing in the business sector is required to understand who needs it and why.

Different Types of Leases

One of the main types of the lease is operating. According to the theory of Pink & Song (2020), this type provides for various financial and technical modes of service. An operating lease is different because the lessor must maintain the leased premises and all the appliances. The price of such additional operations is usually included in the rent and is not charged separately (Giner & Pardo, 2018). Often there is such a practice when the lease agreement is concluded for a period shorter than the period during which the leased object can be used (Wang et al. 2019). In such cases, the lessor’s motives are to sell the used equipment to recover the costs.

The second type of standard lease that is widely used is financial. It has several significant differences from the operational view (Magli et al. 2018). A financial lease does not provide for repair and maintenance, does not imply termination of the contract, and is valid for a period of equal opportunity to use the equipment. In this case, the landlord is an intermediary between the producer and the user (Pink & Song, 2020). This means that the tenant chooses the required equipment and asks the landlord to buy it to rent.

A Lease is Better than Buying

Renting is a good offer because it does not require an immediate significant investment of money. Instead, the tenant signs a contract in which he undertakes to pay a certain fixed fee for each specified period. Renting avoids a lot of paperwork and liability for the building or equipment that went wrong (Pink & Song, 2020). Leasing allows redirecting existing capital into business development instead of buying a building or equipment.

The lease allows timely and much cheaper modernization. When a large amount of equipment is bought with capital, it has to work until it pays off, and thus if the production volumes are not too large, it can take a long time. In the case of a lease, the equipment does not need to be thrown away, and capital is not invested in it. It will be enough to exchange it in order to rent new units. Thus, the lease optimizes the enterprise and will not allow it to become obsolete.

Lease Valuation Factors

In order to decide whether or not to sign a lease, several factors must be considered. The monthly payment amount is one of the main rental criteria (Pink & Song, 2020). It must be fairly defined to be consistent with the service or product. If the cost is too high, renting such equipment or a building does not make sense and will not be profitable. The next factor that should be considered when making a lease is the duration of the contract. The lease time can usually be agreed upon with the landlord to come to the most favorable conditions for both parties. However, sometimes, the duration is fixed and cannot be changed. Understanding and thoroughly analyzing the possible time of use of the rented item is essential. The down payment is another important factor when evaluating a possible lease.

Conclusion

Deciding to rent is a complex decision that requires a professional approach. Various rental norms and qualifications are essential before entering a deal (Pink & Song, 2020). The result can be disastrous if people ignore the historical parameters of the landlord’s choice and the goods. To avoid making a mistake when concluding a lease, it is essential to carefully analyze all the factors that may affect the property in the future.

References

Giner, B., & Pardo, F. (2018). . Australian accounting review, 28(4), 496-511. Web.

Magli, F., Nobolo, A., & Ogliari, M. (2018). . International Business Research, 11(8), 76-89. Web.

Pink, G. H., & Song, P.H. (2015). Gapenski’s understanding healthcare financial management (7th ed.). Chicago: Association of University Programs in Health Administration and Health Administration Press.

Wang, X., Li, L., & Xie, M. (2019). . International Journal of Production Research, 57(18), 5705-5724. Web.

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IvyPanda. (2024, May 25). Leasing Decisions' Effect on Financial Leverage. https://ivypanda.com/essays/leasing-decisions-effect-on-financial-leverage/

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"Leasing Decisions' Effect on Financial Leverage." IvyPanda, 25 May 2024, ivypanda.com/essays/leasing-decisions-effect-on-financial-leverage/.

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IvyPanda. (2024) 'Leasing Decisions' Effect on Financial Leverage'. 25 May.

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IvyPanda. 2024. "Leasing Decisions' Effect on Financial Leverage." May 25, 2024. https://ivypanda.com/essays/leasing-decisions-effect-on-financial-leverage/.

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IvyPanda. "Leasing Decisions' Effect on Financial Leverage." May 25, 2024. https://ivypanda.com/essays/leasing-decisions-effect-on-financial-leverage/.

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