Lease accounting is very important for certain businesses. The leasing company buys capital equipment, which is used by the user (lessee). In return, the user uses that equipment and in return, pays an amount of rent during a specified time period.
If you are starting a business, you may need to buy equipment to flourish your business. But buying them can become costly, especially if you have just started. Instead of buying equipment, you can lease equipment. Let’s see what benefits certain businesses can get from lease accounting.
Benefits of Leasing Equipment
Save Money
If you lease equipment, you can save a lot of your capital for a daily business expense, other business-related expenses, or business expansion. If you lease some equipment, you can set up a budget as the expenses will become predictable.
This will allow you to set up long-term plans for your business without worrying about any price hikes or unexpected expenses, and you will be confident in your plans.
This way, you will be able to procure the equipment you need to set up your business, and you will still have enough money for other expenditures.
Upgrade Your Equipment
Depending on what type of business you are doing, you may need to upgrade your equipment to stay on top among your competitors. If you are planning on keeping that upgraded equipment for a long period of time, then you’re fine.
But what if you need the equipment for only a short amount of time? Instead of buying and reselling them, you can lease them. As a lessee, you can determine the time period for which you need it, and then you can stop paying rentals for it.
If you are working with technology that changes rapidly over time, taking a short lease is the best option for you. If you are a lessee, you can just lease a piece of equipment, use it till it becomes obsolete, and then stop using it. What happens to that specific equipment will be the lessor’s concern, not yours. This will ensure that you are always on the cutting edge in your industry, and you will save a lot of time and money.
Tax Benefits
There are lots of tax benefits you can get by leasing. In a lot of cases, the lease payments are deducted against your current earnings. Also, you can save your money on working capital. This wouldn’t have been possible if you had purchased your equipment upfront.
Before buying any equipment, it is better to consult with a tax advisor to see if you will get any benefits by leasing equipment.
The Balance Sheet Will Look Good
If you have just started your business and are tight on capital, you may be stuck in a long-term debt if you buy your equipment upfront, which will be reflected in your balance sheet. Firstly, you will have a hard time securing funds for your business, plus your balance sheet will look bad. No one likes to see a balance sheet full of debt, right?
Instead, if you lease your equipment, the monthly lease payments will look like a business expense (acts like a hidden liability), and your balance sheet will have little to no debt, making it look cool.
Easy to Get Approval
When buying or upgrading equipment, you may need to take a loan. Even large enterprises need to borrow money from banks to buy stuff.
But getting a loan from a bank is really hard. There is tons of paperwork, and then you have to wait for days to know whether your request was approved or rejected. Even then, there is a chance your request will get rejected, especially if you need a large amount of money and don’t have a suitable mortgage.
That’s not the case for leasing equipment. Unlike banks, there are no requirements for leasing a piece of equipment. Depending on the leasing company that you are working with, you can get approved within 24 hours.
Flexibility
Unlike loans from banks, leasing gives you more flexibility. You can adjust the rental schedule to accommodate your needs.
No Need to Worry About Selling
Selling a piece of equipment once you don’t need it can become hard, especially if that item becomes outdated. If you want to start using other equipment, you don’t have to worry about how to sell it.
You can send the equipment back to the leasing company you are working with, and then you can pick an updated version.
How To Manage Leases with the Right Accounting Tools
Lease accounting can be beneficial for certain businesses. But, managing those leases using lease accounting techniques manually can be really hard, especially if you don’t have enough knowledge.
To avoid this issue, it is better to leave your lease accounting to third-party software. That’s where EZLease comes into place.
EZLease is a simple lease accounting management software for ASC 942, GASB 87, and IFRS 16. They ensure long-term compliance for lessees and lessors.
You can now get compliant within 24 hours. So, no need to constantly switch between spreadsheets or using solutions that are complex and expensive.
There are no implementation costs, and you can set up your account in just a few minutes. The lease accounting rules and calculations are already installed in the software and are constantly updated, so you don’t have to worry about implementing them manually.
You can add leases in bulk using a simple template that is provided by them. If you are in a rush, EZLease also gives you a push-button to close your accounting and disclosure reports quickly.
Wrapping Up
Lease accounting comes with lots of benefits, especially for small businesses. If you want to make lease accounting easier and efficient, you should give EZLease a try.
Interesting Related Article: “What Does Total Fixed Cost Lease Mean?“