What is a concern with over structuring a lease?

• A. Too much initial cash or too short a term put undue pressure on cash flow and could force payment issues
• B. It improves cash flow
• C. It reduces risk of default
• D. It guarantees timely payments

Answer: (A)

Structuring leases affects liquidity and near-term cash flow. If a lease is front-loaded with a large upfront payment or set up with a very short term, the company must commit a big amount of cash right away or face high periodic payments in a tight window. That creates a liquidity squeeze, making it harder to cover other obligations and heightening the risk of missed payments or default, especially if revenue is volatile. In contrast, a structure that distributes payments more evenly over a longer term helps smooth cash flows and reduces the chance of payment issues.

The other statements aren’t accurate because front-loading or shortening the term does not improve cash flow; it actually strains it. It also does not inherently reduce default risk; it can increase it if cash becomes tight. And lease payments aren’t guaranteed—they depend on the lessee’s ongoing ability to pay, not on the lease structure alone.