How a well-structured lease model can improve future debt-taking capacity

For many growing businesses, the biggest challenge is not just accessing funds — it’s accessing them at the right time and at the right cost without damaging the company’s long-term financial health.

One financial strategy that is proving to be highly effective for small and mid-sized enterprises (SMEs) is the use of operating leases instead of traditional loans to fund capital expenditure (CapEx). When structured properly, an operating lease keeps your balance sheet cleaner, improves financial ratios, and boosts your ability to take on more and cheaper debt in the future.

An operating lease allows your business to use an asset (like equipment, machinery, IT hardware, retail store fit-outs, solar panels, etc.) without owning it. Instead of taking a loan to buy the asset, you pay monthly or quarterly lease rentals to use it — just like renting.

Result? Your balance sheet remains lean and healthy.

Let’s start with a simplified balance sheet and show which components impact important financial ratios:

This measures how much your business has borrowed compared to the money you or investors have put in. Formula: Debt-to-Equity = Total Debt / Shareholder Equity

Why it matters: Banks and lenders check this to assess your creditworthiness. A high D/E ratio means your company is already heavily leveraged and might not be able to repay more loans.

How leasing helps: Since operating lease is not treated as debt (under IGAAP), this ratio doesn’t worsen. You can still take loans when required — and possibly at a better rate.

Formula: TOL/TNW = (Total Outside Liabilities) / (Tangible Net Worth) This is one of the most important ratios used by banks to approve term loans, especially for SMEs.

Why it matters: A lower ratio shows that your external borrowings and liabilities are not excessive compared to your own capital.

How leasing helps: Leases don’t count as “outside liabilities,” so the ratio stays favorable, and you become a better candidate for fresh term loans or working capital.

Formula: ROA = Net Profit / Total Assets

Why it matters: This shows how efficiently you’re using your assets to generate profit. A higher ROA is seen positively by investors and banks.

How leasing helps: Leased assets don’t appear on your balance sheet, so the “total assets” denominator is smaller — which increases your ROA.

Formula: ROCE = EBIT / (Total Assets – Current Liabilities)

Why it matters: ROCE shows how well your business generates profit from the capital it uses. This is especially useful in asset-heavy businesses like manufacturing, retail, solar, etc.

How leasing helps: Again, since leased assets are not added to the balance sheet, the capital employed appears lower — resulting in higher ROCE.

Many companies rush to take term loans for CapEx. But here’s what happens:

Now, imagine taking an operating lease first:

Important tip: Always use operating lease first to keep your financial profile strong. Then raise debt if and when required — not the other way around.

Credit rating agencies look at your capital structure, leverage, liquidity, and debt servicing ability. Leasing keeps your leverage low and balance sheet clean — which helps in upward rating movement.

Companies with better credit ratings get:

If you’re a high-growth business planning to expand — be it through new retail stores, manufacturing equipment, IT hardware, plant and machinery, or even green energy projects — leasing can be your strongest ally.

It helps you:

Lease smart, borrow strong. The order matters more than you think.