What is a lease in business finance and the merits and demerits?

Leasing is just a method for borrowing money.

Typically, a lease is geared toward only paying off a percentage of the initial total purchase price.

The main benefit of a lease over other finance methods is that you don't have to pay off the full amount borrowed during the term of the lease, so the interest payments will be lower. At the end of the lease, you can either refinance the residual on another loan, pay it out in one hit and keep the item you loaned against, or sell the item and use the sale proceeds to pay out the residual.

Additionally, the regular lease payments can usually be treated as an expense, so you receive a tax benefit immediately, without having to wait for depreciation. You would need to confirm this with your local accountant as laws will change in different localities.

Probably the main negative relates to the main positive. Because the lease is structured to have a residual remaining at the end, you don't own the item once the lease expires, unless you pay more money.

This type of arrangement is great for items with a relatively short life, such as computing equipment. After two to three years, the usefulness of the equipment deteriorates markedly, so it can be better to replace it. It can make sense in this case to lease, 'give back' the equipment at the completion of the lease and start again.

I hope that this helps!

Cheers
Alister
http://www.marketscience.com.au