2. Leasing as a Source of Capital
By leasing, you're only buying the best years
and most trouble-free usage of the item.
Leasing or renting an asset is an effective
source of debt-based capital. The most
common example is leasing office space.
Instead of tying up cash in purchasing a
building or investing in leasehold
improvements, most companies simply
execute a lease with a landlord.
3. Why Lease?
A lease is simply a financing contract, just like
buying. But you only pay for the time that you
use the item rather than its total cost. Your
initial cash outlay is significantly less, freeing
up the money to be used for other
purposes. Your lines of credit and sources of
capital aren't tied up in equipment. Instead,
they're available for opportunities such as
inventory, marketing, working capital or
personnel.
4. IMPORTANCE
Leasing allows you and your business the use
of equipment that is vital to your success,
without having to own a depreciating asset
or drain more of your operating budget
than is already necessary. It costs less
initially and per month than buying, and
has tax benefits that buying doesn't. When
the term is over, you can walk away from
the equipment or buy it... with the
advantage of having used it first to assure
that it meets your needs.
5. CONT.
Anyone who doesn't want to put their money into
"depreciating" assets should be leasing. By paying cash
for your equipment, in time your purchase is worth
consistently less, but you keep paying as though it were
new. By leasing, you're only buying the best years and
most trouble-free usage of the item. As a business
owner, you know that staying current with your support
equipment can make all the difference, and by leasing
you have more money available to take care of other
important operating expenses. There is significantly less
paperwork with leasing and no complicated
depreciation schedules to maintain.
6. Leasing concepts
Before diving headfirst into leasing, brush up on the following key concepts and risks..
Risk of ownership
Real financing cost
Used versus new equipment
7. Risk of ownership
Most equipment leases are structured to transfer the
risk of ownership to the lessee, so insurance,
property taxes, maintenance, and so on all fall on the
shoulders of the party leasing the equipment. But
the leasing company has a secured interest in the
asset being leased (to protect their interests).
In other words, in most cases, the leasing company
retains legal title to the assets being leased. If the
business (lessee) defaults on terms of the lease, the
owner (the lesser) can repossess the asset.
8. Real financing cost
• Understanding the true cost of a lease in terms
of the implied interest rate being charged is
important.
• Leasing companies use all types of tricks and
tactics to improve their returns, including
requiring payments to be made in advance (for
example, on the first day of the month rather
tha the last), havi g the fi st a d last o ths’
lease payments made in advance, structuring
fair-market value buyout options, and so on.
9. Used versus new equipment
Leasing is best utilized when the equipment is
new rather than used, because the interest
rate charged and the amount of lease
financing provided will be most favorable to
the lessee. That’s e ause the value of used
e uip e t does ’t p ovide the lesse as
much collateral as new equipment.
Attempting to secure lease financing on
used equipment is difficult and expensive.
10. Leasing vs. Bank Financing
Description DSC Lease Bank Financing
Interest Rate Fixed rates and
payments
Rates are usually
adjustable
Term Usually up to 5 years,
and up to 7 years over.
Usually 2-3 years, and
the bank must be made
whole annually
Down Payment 100% financing Typically 20-30% of total
cost
Financial Statements Not mandatory . Required on almost all
transactions .
Financial Reporting Not required to be
shown as debt on your
balance sheet
Carried on balance
sheet as debt
11. Leasing vs. Bank Financing
Description DSC Lease Bank Financing
Sales Tax,
Installation,
Training,
Freight/Shipping
Leasing is 100% financing
and covers all of these
costs
Must be paid by your
o pa y i adva e… a
add up to thousands
Hidden
Requirements
None Compensating balances,
other bank charges and
loan covenants
Tax Benefits Usually 100% deductible
over the term of the lease
Dep e iated ove the IRS’s
useful life of the
equipment
Effective Cost Lower than bank financing
due to tax benefits,
lower/no down payment,
longer lease term and no
required compensating
balances
Higher cost due to longer
depreciation schedule,
larger down payment,
adjustable interest rate,
and other hidden charges
12. Leasing vs. Cash
Is cash always King? Not always. Paying cash for equipment has
significant drawbacks when compared to leasing.
• Leasing should be used to acquire depreciable assets such as
equipment, so that available or excess cash can be spent on
things that are not traditionally financed such as sales,
marketing and personnel.
• Leasing preserves working capital
• Leasing protects obsolescence
• Leasing allows for the acquisition of equipment without a
substantial cash outlay
• Leasing offers tax benefits
• Leases can be custom-tailored with skip payments or deferred
payments for seasonal businesses
• Leasing permits upgrading equipment without impeding cash
flow
13. CONT.
Leases are most commonly structured with
assets that have an extended life, such as
buildings and capital equipment
(manufacturing equipment, furniture,
computers, autos, and so on). Structuring
leases for capital equipment are also used
extensively in the business community and
provided by numerous financing or leasing
companies.
14. Advantages And Disadvantages Of
Leasing
Advantages Of Leasing
Acquisition of long-term assets requires
huge cash outlay which is some times
quite beyond the financial capacity of
the actual user. In such a situation, the
user can lease such capital assets.
Leasing serves as a long-term funding
that can be used for acquisition of
capital assets. The advantages of
leasing are as follows:
15. 1. Leasing Permits Alternative
Uses
A leasing arrangement provides a firm
with the use and control over the assets
without incurring huge capital
expenditure and requiring to make only
periodical rental payments. Thus,
leasing saves funds for alternative uses.
16. 2. Leasing Arrange Faster And
Cheaper Credit
Leasing companies are generally more
accommodating than banks and other
financial institutes in respect of terms
of financing. As such, it has generally
been found that acquisition of assets
under leasing arrangement is cheaper
and faster as compared to acquisition
of assets through other sources of
financing.
17. 3. Leasing Increases Lessee's
Capacity To Borrow
Leasing arrangements enable the lessee
to use more of its own funds for
working capital purposes instead of
using low yielding fixed assets. The
debt-equity ratio of lease does not
alter because of assets acquired under
lease arrangements. As such lease
arrangements can resort to further
borrowings in case the need arises.
18. 4. Leasing Protects against
Obsolescence
Lease arrangements helps to protect the
lessee against the risk of obsolescence
in respect of the assets which become
obsolete at a faster pace.
19. 5. Boon For Small Firm
Acquisition of assets through a leasing
arrangement is particularly beneficial to
small firms which can not afford to raise
their capacity on account of scarcity of
financial resources.
20. 6. Absence Of Restrictive
Convenience
The financial institution while lending
money usually attach several
restrictions on the borrowers as regards
management, debt-equity norms
declaration of dividends etc. Such
restrictions are absent in the case of
lease financing.
21. 7. Trading On Tax Shield
In case of a non-tax paying lessee, the cost
of financing an asset is much higher as
compared to a tax-paying lessee.
However, when tax-paying owns the
assets, he generally passes a part of the
tax benefit to the lessee by means of
lower rental charge. As a result of this
favor, the real cost of the asset to the
lessee, work out to be lower than that
what it would have been if he were the
owner of the assets
22. Disadvantages Of Leasing
Major disadvantages of leasing are as follows:
1. Deprived On Ownership a leasing arrangement,
the lessee does not get the ownership of the
asset. it gives only the right to use. As such, the
lessee, cannot pledge the asset for securing loan
from financial institutions.
2. Deprived Of The Asset IN Case Of Default
In case the lessee makes a default in rental
payment, the lessor is entitled to take over the
asset and the lessee has no right to prevent him
from doing so.
23. Conclusions.
Leasing is a source by which
companies can get more use of
their assets. Simply by consuming
not more they can use that money
in other purposes to increase the
quality of their products. For small
firms, it is frequently being used.
In 3rd word countries it has much
more importance.