Leasing or loan: impact on cash and ratios

Quick answer. Leasing and a loan finance the same investment by two opposite routes. The loan brings the asset onto the balance sheet and the debt into liabilities, with deductible depreciation and interest. In French statutory accounting (the PCG framework), leasing stays off-balance-sheet as long as the option is not exercised: only the rents are deductible and the displayed debt ratios are preserved. The right choice is decided on your starting cash, the full cost and the balance-sheet effect sought, never on the displayed instalment.

Financing a machine, a utility vehicle, IT equipment or premises 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 future borrowing capacity diverge sharply. And the deciding factor is almost never the displayed instalment. This article sets out the comparison as a decision tool, with a table, a worked example and the method we apply in our engagements.

The loan and leasing answer the same need through two opposite legal logics, and it is this difference in ownership that explains most of the effect gaps.

With the loan, the company buys the asset: it enters its balance sheet and the matching debt appears in liabilities. It repays the principal and pays interest, owning the asset from day one. With leasing, an operation governed by the French Monetary and Financial Code (art. L313-7), the company rents the asset from a body that remains its legal owner throughout the contract, with a purchase option at maturity. It pays rents, then can exercise the option to become owner at an agreed residual price.

The nuance is not merely legal. As long as the option is not exercised, the asset does not belong to the company: it therefore does not enter its accounting assets under French standards, which changes everything for the balance sheet and ratios. The day it exercises the option, however, the asset joins its assets at the residual price: the off-balance-sheet advantage is therefore temporary, and limited to the rental phase.

The first practical criterion is the cash effort, at the start and over the whole term of the contract.

The loan often requires a down payment or partial self-financing, the institution not systematically funding the whole asset. Leasing generally finances the entire investment, with no down payment, which preserves starting cash. For a young, growing company, or one whose working capital need is already tight, this preserved cash can be decisive. In return, leasing rents are frequently higher than the instalments of an equivalent loan, because they include the lessor's margin, the residual value risk and the option service.

The cash arbitrage is therefore costed over the whole term, down payment and option value included, and never on the instalment alone. Reading the cash plan, set against the intermediate management balances, shows whether the repayment effort can be absorbed by the operation, month after month, without a cash squeeze. If the question is the profitability of a financed product rather than the cash itself, the reasoning extends to the contribution margin on variable costs, to check that the financed equipment does generate a sufficient contribution.

It is on the balance sheet that the gap is most marked, and most strategic for the rest of your financing.

In French statutory accounting (the PCG framework), the loan weighs on the balance sheet: the asset is in assets, the debt in liabilities, which mechanically worsens the debt ratio (gearing) and net debt ratio. Leasing stays an off-balance-sheet commitment during the rental phase: neither the asset nor the debt appears on the balance sheet, only the rents go through as charges, and the remaining commitment is simply disclosed in the notes. Leasing therefore preserves the displayed debt ratios as long as the option is not exercised, which can be decisive to keep borrowing capacity or respect bank covenants.

A word of caution, though: a seasoned banker often restates the leasing commitments read in the notes to rebuild an "economic" debt. The balance-sheet advantage is therefore real for gross ratios, but not always for a lender's in-depth analysis.

Leasing and consolidated accounts: the PCG advantage disappears#

International accounting standards (IFRS 16) treat lease contracts differently, largely bringing onto the lessee's books a right-of-use asset and a lease liability, from the start of the contract. The off-balance-sheet distinction therefore mainly applies to French statutory accounts under the PCG. For a company consolidating under IFRS (listed group, subsidiary of an international group, structure required to prepare consolidated accounts), leasing joins the balance sheet and the PCG advantage disappears: you must then reason on the consolidated accounts, not on the statutory accounts alone. If you belong to a group or are heading for consolidation, have the treatment validated by your chartered accountant before deciding on the balance-sheet effect alone.

Both solutions are deductible, but in different ways and at a different pace.

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

The deductibility of rents is broad, but caps exist for passenger vehicles. The share of rent matching the vehicle's depreciation above the tax deduction cap (a flat amount, lowered for the highest CO2-emitting vehicles, Tax Code art. 39, 4) is added back by the lessor and is not deductible, exactly as for non-deductible depreciation in case of purchase. Leasing therefore does not allow these limits to be escaped: on a passenger vehicle, the tax advantage of leasing is neutralised. The exact applicable cap should be checked case by case according to the vehicle type and emissions (cap in force, BOFIP). If the investment also opens a right to a tax credit or generates a VAT credit, the cash lever may play elsewhere, on the pre-financing of these receivables, independently of how the asset itself is financed.

The advantage of leasing rests partly on an assumption: the residual value set in the contract, that is, the price of the purchase option. This estimate may turn out to be off the asset's real value at the end of the contract, in either direction.

If the residual value is underestimated, exercising the option is a good deal: you recover an asset worth more than the price paid. If it is overestimated, exercising the option means paying for an asset above its market value; it is then better not to exercise the option and to return the asset, provided the contract allows it without penalty. In every case, do not sign a residual value without checking it against a prudent estimate of the asset's value at maturity, especially for an asset with uncertain depreciation.

Early exit is the other risk to ring-fence. Terminating a lease before term most often triggers contractual penalties, sometimes heavy, which can wipe out the whole benefit of the structure if the need disappears earlier than expected. Before signing, have the cost of an early termination costed and check the assignment or transfer clauses of the contract. For an asset whose real useful life is uncertain, this exit flexibility weighs as much as the rent.

Our view#

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

Our method is to cost the full cost of both solutions over the whole 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 bank headroom, leasing is often relevant. For one with a down payment seeking the lowest cost, the loan regains the edge. A point many forget: the nature of the asset matters as much as the structure. An asset that depreciates fast or quickly becomes obsolete (IT, technology equipment) suits leasing well, which transfers the residual-value risk to the lessor; a durable, easily resold asset leans towards purchase. On the tax side, the BOFIP confirms that movable-property leasing rents are deductible under the ordinary rules for charges (BOI-BIC-BASE-60-20): the issue is therefore not deductibility in principle, but the pace and the caps. When the arbitrage crosses a holding strategy through a parent company, our business taxation support helps frame the decision beyond the financing plan alone. The right choice is decided on the full scenario, in line with prudent scenario planning, not on the displayed instalment.

A growing services SME had to finance an equipment line of about 80,000 euros. Two offers on the table: a 5-year loan at a slightly lower total cost, but with a 15,000-euro down payment and balance-sheet entry; a 4-year lease, with no down payment, off-balance-sheet, with a purchase option at 4% of the original price.

On paper, the loan won on gross cost. But the owner planned, eighteen months later, to request a much heavier growth financing. The loan would have tied up 15,000 euros of cash immediately and worsened the debt ratio, at the risk of weakening that future request. Leasing, with no down payment and off-balance-sheet, preserved both the cash and the displayed ratios. The cost gap (of the order of a few thousand euros over the term) was accepted as the price of the financial flexibility kept. The option exercise was budgeted from the start in the cash plan, to avoid the classic bad surprise of a final rent followed by a residual price to pay. The decision was made on the full scenario, not the instalment.

In practice: how to decide in a real case#

• Cost the total cost of both solutions over the whole term: down payment + sum of instalments or rents + option value, not the monthly amount alone.
• Factor the down payment into the cash analysis: a "cheaper" loan that drains 15,000 euros of cash is not always the right call for a tight company.
• Measure the effect on the debt ratio and anticipate your next financing needs over 24 months.
• Check the nature of the asset: fast-obsolescence asset (leasing often suitable) or durable, resellable asset (purchase often preferable).
• Check the contract's residual value against a prudent estimate of the asset's value at maturity, and cost the price of an early exit.
• For a passenger vehicle, neutralise the tax effect: the CO2-linked deduction cap applies in both structures.
• Have the lease contract reviewed: term, residual value, early-termination conditions and penalties, which weigh heavily in case of early resale.

• The lowest instalment or rent is not the best choice: only the full cost over the term, option included, counts.
• The off-balance-sheet advantage is real for displayed ratios, but an attentive lender restates the leasing commitments read in the notes: do not overestimate this optical effect.
• The off-balance-sheet advantage is temporary: on exercising the option, the asset joins the balance sheet at its residual price.
• Under IFRS 16, leasing is largely brought back onto the lessee's balance sheet: the French PCG advantage disappears in consolidation.
• A poorly estimated residual value can turn the option exercise into a bad deal: check it against the expected market value.
• On a passenger vehicle, the non-deductible depreciation cap (lowered for the highest CO2-emitting vehicles, Tax Code art. 39, 4) also applies to the matching share of rent: expect no tax advantage from leasing.
• Early termination of a lease can be costly (contractual penalties): to anticipate if the asset's useful life is uncertain.
• The option exercise has a cash cost to budget from the start, otherwise the contract end is poorly prepared.