What Small Business Owners Need to Know About Lease Obligations
For many small business owners, signing a lease is one of the first big steps toward growth, whether it’s for a storefront, office space, or equipment. But what’s written in that lease agreement can have long-term implications for cash flow, tax reporting, and your overall financial health.
According to a 2023 study by the National Federation of Independent Business, nearly 58% of small businesses lease at least one property or piece of equipment, making leases a significant recurring cost for most entrepreneurs. That’s why it’s critical to understand not just what you’re agreeing to, but how those obligations impact your books.
Here’s what every small business owner should know about lease obligations—and how to manage them wisely.
Understand the Different Types of Leases
Not all leases are created equal. Depending on the terms and structure, your lease could be classified differently in financial reporting, which in turn affects your balance sheet and tax filings.
The two main lease types:
Operating leases – Traditionally kept off the balance sheet, these are more like rental agreements. They’re common for short-term property and equipment rentals.
Finance leases (formerly capital leases) – Treated more like asset purchases. The business assumes ownership-like responsibilities, and the lease appears on the balance sheet.
As lease accounting standards continue to evolve, businesses now need to be more precise in how they classify and report lease agreements. Using tools like FRS 102 lease accounting software can simplify compliance and reduce the risk of costly reporting errors.
Know What You’re Really Paying For
Leases can be more complicated than just monthly rent. Many agreements include additional charges or responsibilities that can add up over time.
Common hidden or variable costs:
Maintenance and repairs—Are you responsible, or is the landlord?
Insurance requirements—Some leases require specific coverage limits
Property taxes or service charges—Especially common in commercial properties
Early termination fees—These can be steep if your business changes course
Annual increases—Leases often include automatic rent escalations
Always read the fine print and, if needed, consult a legal advisor before signing. A seemingly affordable lease can become expensive if it comes with unpredictable extras.
Track Your Lease Obligations for Financial Planning
Lease payments don’t just affect your current expenses—they impact how you plan for the future. Whether you’re applying for a loan, bringing on investors, or budgeting for expansion, your lease obligations need to be accurately reflected in your financials.
Ways to stay on top of lease obligations:
Use accounting software that tracks and amortizes lease payments
Create calendar reminders for renewal, termination, or escalation dates
Review all leases annually to ensure they still serve your business
Maintain digital copies of all lease agreements in an accessible format
Factor lease costs into cash flow forecasts
Misreporting or underestimating lease liabilities can lead to compliance issues, surprise costs, and missed financial targets.
Lease Accounting Is Changing - Stay Updated
Small businesses that report under frameworks like FRS 102 are now required to disclose more detailed information about their lease obligations. This means many leases previously considered off the books are now part of your formal financial statements.
Benefits of using FRS 102-specific tools:
Automates lease classification and amortization schedules
Improves accuracy in financial reporting
Supports compliance with evolving accounting standards
Makes audits and reviews easier
Helps with scenario planning for lease renewals or exits
Adopting FRS 102 lease accounting software can save time, improve visibility, and help you make smarter decisions about leasing vs. owning.
Final Thoughts
Leasing can be a powerful way to scale your business without massive upfront costs—but only if you manage those obligations wisely. Understanding your lease terms, planning for variable costs, and using the right tools for financial tracking are essential for protecting your bottom line.
As lease accounting regulations evolve, staying ahead of the curve isn't just smart—it’s necessary. Tools like FRS 102 software aren’t just for accountants—they’re for every business owner who wants clarity and control over their commitments. Because when you know exactly what you’ve signed up for, you can plan confidently for what’s next.