Advantages of financial leasing over debt
QUESTION ONE
A finance lease is an agreement whereby the lease gets the ownership of an asset before the expiry of the ownership date of the lease. A lease is a financial agreement where the lessor gives rights to a lessee to use property owned by a lessor. The Lessor in turn receives a certain amount of periodic payments.
Advantages of financial leasing over debt
Balanced cash flow
Receipts of payments are spread out across a number of years. This saves the burden of having to make one significantly huge payment. Leasing enables a business to have a steady cash flow. On the part of the lessee, leasing will enable him to pay for a product in intervals.
Better usage of capital
Choosing to lease over taking an investment on an asset enables a firm to have capital to fund other activities or businesses in its portfolio. Leasing saves money for other important investments.
Better planning
Expenses on leases are constant over the lifespan of an asset. Leasing allows a user to plan better on his expenditure when he takes a budgeting exercise.
QUESTION TWO
Pros and cons of each of the financial alternatives given in the case
Borrow and buy
Pros
- Low interest rates – low interest rates are generally charged on borrow and buy
- Maintain control
- Flexibility
Cons
- Requires profitability – when you make a huge investment on an asset, it should be a profitable venture
- Complicated – It is relatively complex to borrow. A lot of procedures have been put in place to control buying
Rely on Federal sources
- Pros
- Funding received does not necessarily need to be repaid.
- Having an endorsement by the sector grows confidence of a business.
- Cons
- They may take some time to process since they operate differently from the business.
- You may be required to align needs of your business to the prospectus of the funding firm so as to acquire funding
Lease
Pros
- Lower monthly payments
- Fast turnover time
- Avoid technical obsolesce
Cons
- Leasing is more costly than the initial investment that would have been taken.
QUESTION THREE
I chose leasing. This is because when you opt for a lease instead of purchasing the commodity, it saves you from obsolescence. The leasing schedule can be adjusted to suit the financial capabilities of a buyer. Leasing is a therefore a very flexible method. Apart from that, the asset can be used without actually investing money on the asset.
Reference
Jessica C. National Railroad Passenger Corporation (Acela financing), Darden Business Financing, 1999