It comes as no surprise that more and more people and companies now choose to lease items rather than purchase them outright.
This is primarily because there’s a lower upfront cost, which means you don’t have to save up and pay a large lump sum to get whatever asset it is you want – you and your business can have it instantly and choose to pay weekly or monthly. It’s now possible to lease almost anything you could buy. This includes cars, property, telecommunication and IT equipment, printers, machinery, furniture as well as construction equipment. The list can go on and on.
In Nigeria’s evolving business landscape, managing cash flow effectively is essential for sustainability and growth. From small-scale enterprises to large corporations, maintaining steady cash flow can be the difference between success and failure. Leasing has emerged as a practical solution, helping businesses in Nigeria access critical assets without overwhelming their finances. This article explores the explicit ways leasing impacts cash flow, using real-world insights from Nigerian businesses.
Preserving Scarce Capital in a Cash-Driven Economy
Access to finance remains a challenge for many Nigerian businesses, particularly small and medium-sized enterprises (SMEs). Leasing provides an alternative to traditional asset acquisition by eliminating the need for large upfront payments.
Case in Point:
A poultry farmer in Ogun State needed an industrial generator worth ₦10 million. Instead of purchasing it outright, the farmer leased the equipment for ₦300,000 monthly. This allowed the business to allocate cash for feedstock, labor, and marketing while keeping operations running smoothly.
Mitigating Depreciation Risks
Depreciation is a major concern for businesses in Nigeria, where assets like vehicles and machinery lose value rapidly due to wear and tear, and harsh environmental conditions. Leasing transfers this risk to the lessor, allowing businesses to focus their cash on operational efficiency rather than worrying about asset depreciation.
Scenario:
A construction company in Port Harcourt leased excavators for a two-year project. Once the project was complete, the company returned the equipment without incurring losses from resale depreciation.
Simplified Budget Management
Another way leasing helps cash flow is that the overall spend of your business is distributed wider. Again, leasing equipment means you’re not having to tap into your company’s valuable cash resources and take out a large chunk to assist in one area of the entire operation to make it function. When you’re purchasing equipment, the entire cash flow of the business is impacted because one large outgoing payment is going to impact how much other departments are able to spend.
That’s the benefit of leasing, as one particular department shouldn’t be responsible for another not being able to purchase equipment because there simply isn’t enough money left for them to spend. With leasing, you’re able to distribute the overall spend on a much wider and flatter scale because you know you’ll have money to spend wherever needed each month, even after lease payments are being regularly taken out.
Through leasing, this also means that other areas of your business will have a chance to lease more equipment because there is money in your budget available to spend. This domino effect can massively help cash flow within your business, without living in the worry that bigger outright purchases will have a negative impact on your cash flow and continue to stretch your budget into the minuses.
Tax Benefits: Easing Cash Flow Pressures
Nigerian tax laws allow businesses to deduct lease payments as operational expenses. This tax advantage reduces taxable income, leaving businesses with more cash to reinvest.
Impact:
A retail chain in Kano leased refrigeration units for its stores and claimed the lease payments as a deductible expense. This reduced their annual tax liability by over ₦3 million, freeing up cash for expansion.
Smaller Monthly Payments
Sometimes, businesses make the mistake of ignoring a leasing option and instead, they take the route of taking out larger loans from a bank and choose to repay those instead. While the assumption might be that repaying a loan to a bank is a cheaper alternative, that’s not always the case as it can have a negative impact on your cash flow depending on its duration, interest rate (fixed or variable) and status (secured against the asset or otherwise).
Leasing means paying smaller regular monthly payments to use the equipment for a fixed term and this tie in with the previous points. If you’ve taken out a loan to purchase any equipment you’ll need, then not only will you be paying the bank, but you’ll end up owning the equipment too. So, you’ll be stuck with the loan repayment as well as the equipment, so you might end up taking another loan out when there’s newer equipment out there that your business might need. This can snowball into much larger debt and with the ever-changing interest rates, you could end up paying more and more each month.
With leasing, you’ll always know what you’re paying as the rates would have been agreed upon beforehand, so your cash flow won’t be hit with any surprises when you least expect it. These monthly payments allow you to plan for the future, such as leasing even more equipment or planning what to do when your lease agreement ends, and you have the option to upgrade, without having to actually own the item and be stuck with it when there might be no use for it or it might be costly to dispose of.
Conclusion
Leasing is reshaping how Nigerian businesses manage their cash flow. By reducing upfront costs, providing predictable payments, and minimizing risks, leasing enables businesses to thrive in a challenging economic environment. From startups to established firms, leasing empowers businesses to stay competitive, adapt to market demands, and invest in growth opportunities without financial strain.
Ready to explore leasing solutions tailored for Nigerian businesses? Contact us today to unlock the full potential of your cash flow!
