How might leasing lead to increased credit availability?

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How might leasing lead to increased credit availability?

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How might leasing lead to increased credit availability?

Explanation & AnswerSolution by a verified expert

Explanation

Firms have easy access to funds through leasing than under a secured loan as it requires less documentation and formalities as compared to a loan. Moreover, the firm can effectively increase the amount of debt by leasing additional assets because a loan agreement may restrict a firm from issuing more debt but could not restrict leasing equipment. Further, the firms in poor financial position and suffered bankruptcy are in position to obtain lease financing at lower cost as compared to debt financing.

Verified Answer

The firms have easy access to funds under a lease agreement than under a secured loan because of less formalities and requirements. Moreover, the firms can acquire funds for a longer period under a lease arrangement that might increase the liquidity and credit availability of the firm. Further, the loan agreement may restrict a firm from issuing additional debt but can not restrict a firm from leasing additional assets.

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