Disadvantages of Lease Financing

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Depending on your situation, the disadvantages may be deal killers, or they may simply become nuisances as your lease term wears on. At a minimum, you should consider them carefully as you explore the possibility of pursuing a lease.

The potential negatives of lease financing include the following:

The property being leased isn't yours. When you acquire equipment under an operating lease, the equipment belongs to the lessor, not to you. Not only do you have to return the property in good operating condition when your lease ends, subject to normal wear and tear, but your lease may place a variety of restrictions on how and where you use your equipment (vehicles, for example, may have mileage restrictions, buildings may have restrictions on leasehold improvements).

You must pay penalties for early lease termination. If the equipment you acquire under a lease doesn't work out for you or your company, terminating your contract and returning the equipment may not be easy. Depending on the terms of your lease agreement, you may have to pay a substantial penalty for terminating the lease early.

It's expensive. Leases are almost always more expensive in the long run than buying items with cash, and leases are sometimes more expensive than obtaining commercial loans to buy the same items. How much more expensive depends on a number of factors, such as

The cost of funds (interest rate) used to calculate lease payments. The higher the interest rate, the more the item will ultimately cost you.

The length of the lease term. The longer the lease term, the smaller the incremental payments.

The residual value of the equipment. The estimate of what the equipment will be worth at the end of the lease.

Lease initiation fees. Fees that must be paid at the start of the lease, including necessary deposits and processing fees.

The capitalized cost of the item. The negotiated price of the equipment.

Although the disadvantages of leasing may not be overwhelming for most organizations, be sure that they aren't going to be a problem for your organization before you even get close to signing a leasing contract. Every organization is different, and an advantage for one may be a disadvantage for another.

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