What Is Leasing?
Leasing is an alternative method of payment for the use of equipment such as a car, truck, sewing machine or any manufactured instrument or heavy machinery, over a specified period of time.
Leasing is similar to renting, but has distinct characteristics. For example, a car can be rented for a day or even a few hours. The minimum lease for a car (or other piece of large equipment) would, however, typically start at 24 months. Unlike renting, leasing doesn't provide for easy termination or vehicle swapping.
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 use to another party (the lessee) for a specified period of time, in return for set payments.
Leasing focuses on the lessee’s ability to generate cash from the use of the leased asset to service the lease payment.
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 whose business is seasonal (such as farmers). Payments can be structured for easy repayment during the post harvesting season.
- Coverage – leasing can provide up to 100 percent of a business’s 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 SMEs.
- Flexibility – the pattern and size of the lease payments can be tailored to a business’s needs
Who Are The Players In Leasing?
In any economy that offers leasing there are Lessors (bankers or leasing companies), Lessees (large firms, small businesses or individuals), suppliers, and government, whose policies and regulations are critical to the success and growth of leasing.
Why Is Price Important In Leasing?
When you lease, the potential lessee negotiates a purchase price with the dealer just as they would if they were buying the equipment. This is a key point that is often overlooked. Dealers have often given customers the false impression that, because it is a lease, the price must be 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 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 convenient 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. We each have different lifestyles and priorities. What is practical or affordable for one person might be impractical and unaffordable for another.
When you buy, you pay for the entire cost of equipment, regardless of how long you will use it. When you lease, you pay for only a portion of the equipment's cost, which is the part that you "use up.”
When leasing, a down payment is not always necessary; you will, however, be liable for sales tax (depending on your countries fiscal regulations) only on monthly payments and pay a premium 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.
Instead of spending a lump sum at once to purchase equipment, leasing frees up funds that can be spent on other business activities, such as salaries.
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.