Many people are now choosing to lease rather than buy their plant and machinery. Leasing is becoming an increasingly important alternative to buying as a means of obtaining the use of plant and equipment, as well as other things such as cars. The rental payments are made up of principal and interest components large enough to write those goods down to a previously agreed residual value at the close of the lease period.
Residual value is the estimated recoverable value of the goods at the conclusion of the lease term.
The lease contract is an important legal document that imposes significant obligations on both parties. This is even more important if the sums of money involved are large, or the arrangements are complex. Leasing can be particularly suitable for fast growing profitable businesses that need to conserve their funds for expansion. In such circumstances, a firm might find that, although the interest rate on leases is higher than on normal lines of bank credit, it may be able to increase its after-tax profit through leasing, rather than purchasing on a borrow and buy basis. Whether this would actually be the case could involve some complex calculations, so you should consult your accountant to work out the figures.