What are Lease Payments?

Malcolm Tatum

Lease payments are payments remitted on a structured schedule to lenders and creditors. With businesses, payments of this type are identified as line items on the company balance sheet, and serve to document the history of past payments as well as the remaining total of lease payments that are due in the future. Identifying the nature of the company’s lease payments as part of the overall corporate debt is key to accurately calculating the fixed-charge coverage ratio currently applicable to the business, and thus serves as an important indicator of financial stability to potential investors.

Consumers not ready to purchase a car may have the option to lease.
Consumers not ready to purchase a car may have the option to lease.

Many businesses choose to lease various assets rather than purchasing them outright. In some instances, the lease payments will be connected with deals that allow the business to lease property like vehicles or land for a period of time, then make a purchase at the end of the lease. Deals of this type are often structured so that the total amount of the monthly lease payments are applied to the purchase price, leaving the debtor with a much smaller amount to pay in order to complete the sale. In the interim, those payments are tracked in the company’s accounting records, making it possible to always know how much has been invested toward that goal.

While lease payments have long been used as a means of having access to land, plant facilities, and even company cars, this sort of arrangement can also be used for other items that are essential to the ongoing function of the workplace. Computers and various types of electronic equipment that is necessary to create an corporate network is an example of what can be purchased using some type of lease to own agreement. The arrangement has value, since it normally does not require a large down payment on the front end, thus giving the company time to generate revenue using the leased equipment and eventually paying for it in full.

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While looking at the nature and amount of lease payments a business currently has in place is important to evaluating the overall financial well-being of the organization, investors should look a little further. This means looking at all forms of short-term and long-term debt and comparing that debt load to the current worth of the assets the company controls. Assuming that the ratio between current debt and existing assets is favorable, and the production and sales figures are healthy, there is a good chance that investing in the business would be a wise move.

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