At times when a company requires to raise capital, they may be need to offload assets from their balance sheet so that the chargeable depreciation is not considered.
When depreciation is taken off the P/L statement, it affects the EBIDTA positively and the company can present better profitability.
MSMEs with small balance sheets needs to keep high depreciation assets off their balance sheet which helps them to achieve better numbers.
In such cases, a lease can be taken up for items like IT Equipments, Windpower Equipments, Machinery, Company Vehicles and others, which are items with higher depreciation.
Since the debt is not shown on the balance sheet the leverage ratio also is better.
BENEFITS
Balanced Cash Outflow: The biggest advantage of leasing is that cash outflow or payments related to leasing are spread out over several years, hence saving the burden of one-time significant cash payment. This helps a business to maintain a steady cash-flow profile.
Quality Assets: While leasing an asset, the ownership of the asset still lies with the lessor whereas the lessee just pays the rental expense. Given this agreement, it becomes plausible for a business to invest in good quality assets, which might look unaffordable or expensive otherwise.
Better usage of capital: Given that a company chooses to lease over investing in an asset by purchasing, it releases capital for the business to fund its other capital needs or to save money for a better capital investment decision.
Tax Benefits: Leasing expense or lease payments are considered as operating expenses, and hence, are tax deductible. A company saves tax on the lease rental paid as with an operating lease, all rentals (Principal + Interest) are expensed off whereas in loan only interest portion is expensed off.
INTEREST RATE
Interest rates for Leasing Solutions are usually in the range of 12.5%