Leasing Basics

WHAT IS LEASING?
Leasing in its simplest form is a means of delivering finance. It is a contract between two parties where one party (the lessor) provides an asset (purchased from a supplier) for usage to another party (the lessee) for a specified period of time, in return for specified payments.

Leasing focuses on the lessee’s ability to generate cash from the use of the leased assets to service the lease payment.

Leasing is a method of payment for the use of equipment such as a car, truck, or any manufactured instrument, over a specified period of time. Although similar to renting, leasing is quite different. While you can rent a car for as little as a day, or even a few hours, leasing typically starts at 24 months and doesn't provide for easy termination or vehicle swapping.

BENEFITS OF LEASING
Some of the many advantages of leasing are:

• Security – the lessor already owns the assets and so may require little or no additional collateral.
• Cash Flow - Lease payments can be structured to the cash flow patterns of a business. This is appealing to potential lessees who do business that is seasonal like agriculture. Payments can be structured for easy repayment according to the high season.
• Coverage – leasing can provide up to 100 percent of your financing needs.
• Affordability - after adding collateral, processing time and fees, leasing is often cheaper than bank credit.
• Availability - Leasing is often the only source of medium-to long term financing for Small and Medium Enterprises.
• Flexibility – the pattern and size of the lease payments can be tailored to your needs

WHO ARE THE PLAYERS IN LEASING?
In any economy that has leasing there are Lessors who could be bankers or leasing companies, Lessees that could be large firms, small businesses or individuals, suppliers, and of course government whose policies and regulations play instrumental roles of the success of leasing.

WHY IS PRICE IMPORTANT IN LEASING?
When you lease, you the potential lessee negotiates a purchase price with the dealer just as you would if you were buying the equipment. This is a key point often overlooked. Dealers haven often misled customers that, because it is a lease, price is always at the full sticker price. This is false.

When you and the dealer agree on a price, and you sign the lease contract, the dealer actually sells the equipment to the leasing company at that price. The leasing company then leases that equipment to you, based on the price given by the dealer. Hence, price becomes the most important factor in what you will pay in monthly payments.

WHAT SHOULD I CONSIDER WHEN CHOOSING A LEASING COMPANY?
As a lessee, you have the option and right to look for your own leasing company to find the best lease terms. These independents can often arrange to get you better prices especially in cases of fleet purchasing arrangements. However, today many dealers are attached to a leasing company. The tradeoff of using an independent versus a captive leasing company is that dealers make it very convinient to arrange for both the equipment and the lease all in a single meeting, and the dealer's captive leasing company can often offer special lease terms to help the dealer move vehicles.

SHOULD I LEASE OR BUY?
It depends on what is most important to you. All of us have different lifestyles and priorities, including the choice of cars and finances. Equipment leasing and buying decisions must be made with those lifestyle and priority attributes in mind. What is right for one person can be totally different for another.

When you buy, you pay for the entire cost of equipment, regardless of how long you will use it. But when you lease, you pay for only a portion of the equipment's cost, which is the part that you "use up.” In leasing, you may have the option of not making any down payment; you will however be liable to pay sales tax only on your monthly payments and pay a money factor that is similar to the interest rate on a loan. With leases, you may also pay extra fees and possibly a security deposit that you do not pay when you buy. You make your first payment at the time you sign your contract.

With leasing, you can spend your cash on other business activities such as salary payments, instead of spending a lump sum at once to purchase equipment.

WHAT HAPPENS AT THE END OF THE LEASE?
At the end of the lease period, the equipment is either sold to the lessee at a nominal fee, returned to the lessor, discarded, or sold to a third party.