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Benefits of Leasing

August 11, 2009 by Gadget  
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Hire Purchase and Lease Purchase are essentially different names for the same thing. The customer, the lessee, selects the product and asks the lender, the lessor, to buy the asset.

The customer then pays the lessor a series of instalments over a defined period – normally between 12 and 60 months. The lessor has title to the asset as security in the event of the customer defaulting. At the end of the Hire Purchase term, the purchase option is taken up by making a single nominal payment, and ownership of the asset transfers to the lessee.

Alternatives to Hire Purchase include cash purchase, bank loan and bank overdraft. Whilst cash purchase may appear not to have a cost there are of course, the opportunity costs of using the money elsewhere within the business. A loan with a bank will often utilise some of your credit line and impact on your ability to obtain an overdraft to fund working capital.

Finance Lease

A lease where the lessor receives the full cost of the equipment, plus interest, from the lessee via the agreed repayments over the primary term of the contract. It is deemed that the lessee takes the risk and reward in owning the equipment, meaning that the asset is treated by the lessee as if it were his own and is therefore shown on his balance sheet.

Operating Lease

A lease agreement whereby the lessor will not recoup the full cost of the equipment from the lessee during the period of the lease. In this instance the lessor will typically assume risk in the asset by estimating a resale value for the equipment at the end of the lease contract’s primary term. At the end of the contract term the lessee may return the equipment to the lessor who must resell the equipment for the assumed resale value, in order to realise a profit. As the lessor is assuming risk in the asset, the asset is shown on the lessor’s and not the lessee’s balance sheet. This is known as off balance sheet funding. An operating lease is most likely to be used when the organisation does not anticipate keeping the product for the duration of its useful life.

Purchase

With outright purchase, the full cost of the equipment is due up front, together with the VAT.

Key Benefits of Leasing

There are a number of benefits to leasing and the most important one will differ from company to company depending upon their circumstances. The main benefits of leasing are considered to be:

Funding Benefits – Leasing can be viewed as an additional funding source.

Conserves Cash Reserves

Leasing enables you to acquire the equipment you consider best for your business, without making a substantial lump sum payment out of your cash reserves, which then can be used elsewhere in the business. Also the opportunity costs of using those reserves elsewhere are limited.

Maintains Credit Lines

The equipment you need can be acquired without denting or impacting other credit lines, such as loans and overdrafts making further borrowing easier.

Cash Flow Benefits

Leasing can improve your cash flow – Instead of one substantial payment, the cost of the acquisition is spread over a number of monthly payments. In many instances these payments can be set to match seasonal cash flow circumstances and requirements.

Fixed Payments Payments are fixed for the term of the contract. You are protected from rising interest rates and you will always know the exact amount of future payments, enabling accurate budgeting and cash flow projections.

Cost Efficient

For many businesses it is advantageous to pay for technological investments over the period that the system or asset is delivering benefit to the business. Payments can be structured to match profiles of benefit realisation. For example, an initial payment holiday followed by payments, which slowly escalate over the first year as the benefits of the asset are realised in terms of increased income or cost savings.

Payment Profile

Payment profiles can be structured to meet budgets, rollout schedules and/or cash flow requirements. This is best achieved by discussing the phasing of the project and assessing the cash flow implications. In this way a payment structure can be proposed which truly matches individual requirements.

Accounting Benefits – Tax Advantages

When using an operating lease, the payments can be deducted as pre-tax business expenses. As they are charged in full against income, they reduce your company’s income tax and other taxes on income.

Balance Sheet

Modern financial controlling methods employ key financial indicators to monitor and guide the business development of a company. Unlike capital expenditures financed by borrowing, a leasing investment does not show up in the balance sheet. As a result, lease transactions do not have a negative impact on balance sheet ratios such as debt-to-equity ratios.

Equipment Benefits

The flexibility of a lease allows the lessor to fund an additional investment which either expands or enhances the original investment, and which extends the anticipated working life beyond the end of the original facility period. The cost of the new investment is added to the remaining balance of the original investment. A new facility period then commences, usually mirroring the new anticipated life of the equipment or system. These managed changes often can be achieved without altering the payments.

The System Upgrade facility provides the flexibility to fund an additional investment, which either expands or enhances your IT estate, but which doesn’t extend its anticipated working life. The cost of the new investment is added to the remaining balance of the original investment. The payments under the facility are increased for the remaining period of the facility.

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