Leasing or loan: impact on cash and ratios

Quick answer. Leasing and a loan both finance an investment, but differently. The loan brings the asset onto the balance sheet and the debt into liabilities, with deductible depreciation and interest. Leasing, in French statutory accounting, stays an off-balance-sheet commitment whose rents are deductible, which preserves debt ratios. The choice depends on starting cash, taxation and the desired balance-sheet effect.

Financing a machine, a vehicle or equipment always raises the same question: borrow to buy, or use leasing? Both end in using the asset, but their effects on cash, the balance sheet and ratios differ markedly. Here is the comparison to decide knowingly.

The loan and leasing answer the same need by two opposite legal routes.

With the loan, the company buys the asset: it enters its balance sheet, and the corresponding debt appears in liabilities. It repays the principal and pays interest. With leasing, defined by the Monetary and Financial Code, the company rents the asset from a body that remains its owner, with a purchase option at the end of the contract. It pays rents and can exercise the option to become owner at an agreed residual price.

The difference in ownership during the contract explains most of the effect gaps between the two solutions.

The first practical criterion is the cash effort at the start and over the term.

The loan often requires a down payment, the institution not always financing the whole asset. Leasing generally finances the entire investment, with no down payment, which preserves starting cash. It is a decisive advantage for a young or growing company, whose cash is precious. In return, leasing rents can be higher than loan instalments, because they include the lessor's margin and the option service.

The cash arbitrage is therefore costed over the whole term, down payment included, not on the displayed instalment alone. Reading the cash plan, together with the intermediate management balances, informs this choice.

It is on the balance sheet that the gap is most marked, and most strategic.

In French statutory accounting, the loan weighs on the balance sheet: the asset is in assets, the debt in liabilities, which worsens the debt ratio. Leasing stays an off-balance-sheet commitment: neither the asset nor the debt appears on the balance sheet, only the rents go through as charges, and the commitment is disclosed in the notes. Leasing therefore preserves debt ratios, which can be decisive to keep borrowing capacity or respect bank covenants.

It should be noted that international accounting standards (IFRS 16) treat lease contracts differently, largely bringing them back onto the lessee's balance sheet. The off-balance-sheet distinction therefore mainly applies to French statutory accounts.

Both solutions are deductible, but in different ways.

With the loan, the company deducts the asset's depreciation and the debt's interest. With leasing, it deducts the rents (Tax Code art. 39). Over the term, the deductible amounts often converge, but their pace differs: leasing can concentrate the deduction over a shorter period than depreciation, which can be a tax-cash advantage. On exercising the option, the asset enters the balance sheet at its residual price and is then depreciated.

The deductibility of rents is broad, but some caps apply, notably for passenger vehicles, as for depreciation in case of purchase.

The choice between leasing and a loan is not just a question of face cost: it commits starting cash and the presentation of the balance sheet. Leasing appeals through the absence of a down payment and the preservation of ratios, the loan through an often lower cost and immediate ownership.

Our method is to cost the full cost of both solutions over the term, down payment and option value included, then to examine the effect on ratios and future borrowing capacity. For a company wanting to preserve its cash and its borrowing capacity, leasing is often relevant. For one with a down payment seeking the lowest cost, the loan regains the edge. The right choice is decided on the full scenario, not the displayed instalment, in line with a prudent scenario planning.

A growing SME had to finance a machine and hesitated between a loan and leasing. The loan offered a slightly lower total cost, but required a down payment and weighed on the debt ratio, at the risk of blocking a future growth financing. Leasing, with no down payment and off-balance-sheet, preserved cash and borrowing capacity. The full-scenario analysis tipped towards leasing, the extra cost being offset by the financial flexibility kept for the future. The option exercise was planned from the start.