What are the Benefits of a Capital Lease?

Patrick Lynch
Patrick Lynch
Businessman with a briefcase
Businessman with a briefcase

A capital lease has numerous benefits over purchasing equipment from a supplier outright. Leasing protects from changes in technology which could render current equipment obsolete. It also offers a guaranteed fixed rate of payment, lowers the impact of inflation, gives an option of outright ownership at the end of the lease, and ensures that a company does not have large amounts of capital tied up in equipment.

Technology is improving at an increasingly rapid pace and it is not uncommon for a piece of machinery to become virtually obsolete within three years. Most capital leases run between one and five years. This means that the lessee will not be stuck with outdated equipment since the terms of the lease usually enable them to replace old machinery with something more up to date. It is difficult to sell outdated equipment. Should an individual or company purchase equipment outright and it is replaced in the marketplace by a superior product, the owner will certainly incur a large loss on the sale.

Inflation lowers the buying power of a currency. When it is combined with depreciation, the value of equipment purchased will fall rapidly over the course of time. Since a capital lease requires the lessee to pay a fixed amount, the impact of inflation is dramatically reduced. The rate of repayment over the course of the lease will generally not rise; changes in inflation will have less impact on a company, allowing it to create a budget with greater confidence. Also, should the rate of inflation rise over the course of the capital lease, the lessee will be paying less in the final year than in the first as the real value of the currency will have decreased.

When a company purchases equipment from a supplier outright, it is required to invest a large sum of money immediately. With a capital lease, the repayments will only be a small percentage of the purchase price, freeing up more capital for the company to spend on other items essential to the business. A capital lease, in other words, allows organizations to enjoy the benefits of using expensive equipment without having to break the bank.

The option to buy is another important advantage of a capital lease. Should the leased equipment prove to be of great use to the lessee, the lessse may elect to purchase it outright. Most capital lease agreements contain this stipulation; companies may take advantage of it if they decide that the equipment leased was of premium quality and it makes financial and business sense to do so.

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      Businessman with a briefcase