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c. Lease rentals paid by the lessee are deductible for computing taxable
profits;
d. It provides finance without diluting the ownership or control of business;
e. The lease agreement does not affect the debt raising capacity of an
enterprise;
f. The risk of obsolescence is borne by the lesser. This allows greater flexibility
to the lessee to replace the asset.

Limitations

a. A lease arrangement may impose certain restrictions on the use of assets.
b. The normal business operations may be affected in case the lease is not
renewed;
c. It may result in higher payout obligation in case the equipment is not
found useful and the lessee opts for premature termination of the lease
agreement; and
d. The lessee never becomes the owner of the asset. It deprives him of the
residual value of the asset.

FACTORS AFFECTING THE CHOICE OF THE SOURCE OF FUNDS

1. Cost:

There are two types of cost viz., the cost of procurement of funds and cost of
utilizing the funds. Both these costs should be taken into account while
deciding about the source of funds.

2. Financial strength and stability of operations:

In the choice of source of funds business should be in a sound financial
position so as to be able to repay the principal amount and interest on the
borrowed amount. When the earnings of the organization are not stable,
fixed charged funds should be carefully selected as these add to the
financial burden

3. Form of organization and legal status:

A partnership firm, for example, cannot raise money by issue of equity
shares as these can be issued only by a joint stock company

4. Purpose and time period:

Business should plan according to the time period for which the funds are
required. A short-term need for example can be met through borrowing
funds at low rate of interest through trade credit, commercial paper, etc. For
long term finance, sources such as issue of shares and debentures are more