Short Term Credit Or Short Term Financing Is Any Liability Asset Financing: Leasing Over Loans

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Asset Financing: Leasing Over Loans

Asset leasing offers businesses unique options over traditional financing to acquire the equipment they need for their operations. Property leases are either in the form of operating leases or capital leases. Each option has its own impact on a company’s balance sheet, but both give businesses additional options for financing the assets they need to expand their business, simplify processes, and generate revenue. In general, financing with a lease agreement is much easier and faster than traditional loan financing through a bank.

Operating leases are agreements for the use of assets and do not allow the business entity any ownership rights. Operating leases are often similar to automobile or apartment leases, where lease payments are made for a set period described in the contract. A company does not list equipment as an asset on its balance sheet, just as a tenant cannot list their apartment as their own asset.

The benefits of an operating lease are that it allows businesses to save money on maintenance costs, get new equipment after the term ends, and use the assets for projects they wouldn’t normally do. For example, a real estate firm might use an operating lease for copy machines over a two-year term. At the end of the period, the firm does not have to worry about remarketing and selling used copies, they can simply be traded for new machines. It also avoids the need to increase maintenance costs as the equipment ages, as sometimes maintenance/warranty costs can be included in the lease payments.

Using an operating lease can help a small or new company get what it needs to take on bigger projects and grow revenue. A construction company may choose this to win a bid on a large job, perhaps instead of spending tens of thousands of dollars for heavy equipment that may only be used for that particular project. A firm may use a short-term lease (perhaps one year) for equipment needed to complete a job, while paying only a portion of the cost of that machinery.

Capital leases are sometimes called financing leases because they give a company ownership rights in the form of financing with a traditional bank loan. Equipment acquired through lease is recorded as an asset of the company and the lease balance is reported as a liability. The main advantage of capital leases is that they are easier to get than traditional loans and have different payment options. It allows small or start-up businesses, with little to no credit, to obtain financing that may not be available to them through traditional means and flexibility in payment options. Apart from their recording on the balance sheet, capital leases differ from operating leases in that they generally have longer lease terms.

Capital leases allow firms with poor or no credit to build their business credit while acquiring assets needed to expand operations and increase revenue. At the end of the lease term, the business will have ownership rights to the tangible assets that can be continued to be used by the business or sold to obtain cash.

These leases may include special financing options to further help businesses acquire the assets they need to generate revenue while keeping overall costs and expenses low. A financing program, such as 90-day deferral or 90-day cash-out, will give a business the option to use the equipment and generate revenue for three months before the lease payments begin; Or, if capital is available, an alternative option is to purchase equipment outright and avoid finance charges.

Another financing option is the use of residuals, or balloon payments, to take ownership of the property at the end of the lease term. The residual option allows for lower monthly payments for the lease term, makes the property more affordable, and thus defers the full cost of payment/interest expense until a later time.

It is not entirely unusual for a capital lease to have a nearly customizable payment option. These options are used for specific industries that may see large changes in revenue over the course of a year, such as seasonal businesses. These options may allow for lower, or no, payments during the down season and continuation of regular amounts starting at a particular time of the year.

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