Assignment 3
Lease vs Borrowing
Financing Equipment
Prepared by
Samit Islam Rudra
Id 2021-2-95-014
FIN501
Lease financing and borrowing are two popular ways to finance equipment for businesses of all sizes.
Both options have their own advantages and disadvantages, so it's important to choose the one that's
best for our specific needs.
1. Lease Financing
Lease financing is a type of rental agreement where we pay a fixed monthly fee to use equipment for a
specific period of time. At the end of the lease term, we have the option to purchase the equipment at a
predetermined price, return it to the lessor, or renew the lease.
Benefits of lease financing:
Lawer upfront costs: Lease financing typically requires a loour upfront payment than borrowing, which
can be helpful for businesses with limited cash flow.
Flexible terms: Lease terms can be customized to fit our budget and needs. For example, we can choose
a shorter lease term if we need the equipment for a specific project, or a longer lease term if we want to
spread the cost out over time.
Tax benefits: Lease payments are typically 100% tax deductible, which can reduce our overall tax burden.
Maintenance and support: Some lease agreements include maintenance and support services, which can
save we time and money.
Drawbacks of lease financing:
We don't own the equipment: At the end of the lease term, we must return the equipment to the lessor
unless we purchase it.
Higher total cost: Lease payments can be higher than loan payments over the life of the lease, especially
if we choose a longer lease term or a purchase option at the end of the lease.
Early termination penalties: If we need to terminate our lease early, we may be subject to penalties.
2. Borrowing
Borrowing to finance equipment involves taking out a loan from a bank or other financial institution. The
loan is secured by the equipment, so we will own the equipment outright once the loan is repaid.
Benefits of borrowing:
We own the equipment: Once we repay the loan, we will own the equipment outright. This gives we the
flexibility to use the equipment as we see fit, including selling it or upgrading to a neour model.
Potential for equity: As the equipment depreciates, we will build equity in it. This equity can be used as
collateral for future loans or sold to generate cash.
Interest tax deduction: Loan interest is typically tax deductible, which can reduce our overall tax burden.
Drawbacks of borrowing:
Higher upfront costs: Borrowing typically requires a larger upfront payment than lease financing.
Less flexible terms: Loan terms are typically less flexible than lease terms. For example, we may be
required to make a fixed monthly payment for a predetermined period of time, even if we don't need
the equipment for the entire time.
Risk of default: If we default on the loan, the lender may repossess the equipment.
Which is the best option?
The best way to decide whether to lease or borrow to finance equipment is to consider our specific
needs and budget. If we need to conserve cash flow or we need the flexibility to upgrade to a newer
model in the future, lease financing may be a good option for us. If we want to own the equipment
outright or we need to build equity, borrowing may be a better choice.
Here are some additional factors to consider when making decision:
Type of equipment: Some types of equipment, such as technology, may become obsolete quickly. If we
need this type of equipment, lease financing may be a better option so that we can upgrade to a neour
model in the future.
Length of time we need the equipment: If we only need the equipment for a specific project, lease
financing may be a better option than borrowing.
Our cash flow situation: If we have limited cash flow, lease financing may be a better option than
borrowing because it requires a lower upfront payment.
Our tax situation: If we can deduct lease payments from our taxes, lease financing may be a more tax-
efficient option than borrowing.
It's also important to compare the terms and costs of different lease financing and borrowing options
before making a decision. Be sure to read all of the fine print and ask questions so that we understand all
of the terms and conditions.
