Introduction to Leasing
Leasing is gaining popularity in Kenya among many business owners in recent times. Lease financing is considered one of the best choices when looking for medium and long-term financing options. In lease agreements, the lessee is the person acquiring the asset. The asset’s owner is known as the lessor. The lease contract grants the lessee the right to utilize particular equipment in exchange for periodic payments. When the lease period is over, the asset will go back to the owner, unless the lease contract is extended, or a case where there is a compulsory buying clause in the lease agreement.
In lease agreements, the lessee doesn’t acquire ownership of the assets. Ownership is retained by the lessor. There are plenty of lease advantages and some disadvantages too.
Lease financing advantages
Leasing comes with benefits both to the lessee and the lessor. However, here we will focus on benefits to the lessee.
1. Good utilization of capital:
By opting to lease assets, a business avoids spending a lot of money to purchase assets upfront. You will acquire the same assets and only pay small monthly or annual rents to utilize them. The funds can be utilized elsewhere, thus making planning easier for the business.
2. Cheaper
Leasing is cheaper when compared to other financing options available for a business looking to acquire assets. It is the ideal choice when you only need the assets for a given duration.
3. Technical support
The lessor remains the owner of the assets. In most cases, to ensure proper maintenance of the asset, they offer technical support to the lessee.
4. Inflation-friendly
The cost of the items can rise due to inflation. However, when you have leased the assets, you are required to pay a fixed amount monthly or annually, whether or not the cost of the asset rises.
Lease financing disadvantages
Leasing also comes with some disadvantages to the lessor. Here are some of the lease financing disadvantages.
I. Ownership
Unlike other financing options, one doesn’t automatically become the owner of the asset at the end of the agreement. In lease purchase agreements, one can become the owner if they make a balloon payment.
II. Compulsion
Lease agreements are usually non-cancelable. This means that you have to pay the installments even when you do not intend to use the asset. If you opt to cancel the agreement, the charges are usually high.
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