 Paying for an asset with cash can be a significant drain on a company's working capital. However, leasing the asset through lease finance gives access to the asset without having to pay for it up-front. Leasing is basically a rental agreement which gives the lessee the right to use an asset owned by the lessor (finance company) for a fixed period of time in return for regular payments (rental payments). You can lease most things, from equipment valued at £1000 to assets worth millions. Leasing contracts are flexible and can usually be tailored to your needs. It is essential to consider the effects of leasing on accounting, reporting, tax, and your cash flow. It is also important to consult your accounting and tax advisors before finalising a lease transaction to reap the maximum benefit and avoid any potential complications.
How Leasing Works
Although there are several types of leasing, they generally all fit one of two categories:
• Direct Lease. You identify the asset, negotiate the price and arrange for the leasing company to buy it from the supplier/manufacturer (if new) or the previous owner (if used) to rent it to you.
• Sale-and-leaseback (also called purchase leaseback). You sell an asset you already own to the leasing company for fair market value or book written down value (whichever is less) and then lease it back.
In both cases, the lessor is the owner of the asset, and rents it back to you. As with any other rental agreement, at the end of the lease you return the asset to the lessor. Some leases grant you an end-of-lease option to renew the lease at a small cost (secondary period) or to sell the asset to a third party as agent of the lessor.
Often the actual equipment manufacturers themselves act as lessors or have an affiliated leasing company. This allows them to help their customers finance transactions with minimum effort. The other two groups of lessors are banks and independent leasing companies.
Options Available:
In general, there are three major types of leasing: finance leasing, operating leasing and contract hire:
Finance Leasing
The lessee effectively acquires all financial benefits and risks without actually acquiring legal title. The leasing rate is computed to collect the full value of the asset (plus finance charges) during the contract period. At the end of the lease, the asset is sold to a third party and you can receive a share of the sale proceeds (if the lease is not being extended). Generally, you will not be able to become the owner of the asset at any time - unless a private arrangement is made with the third party. However, you usually have the option to extend your lease and as you will have paid for almost the full value during your initial lease period, the rental payments for subsequent periods is likely to be minimal.
Operating Lease
This often has a shorter timescale than financial leasing and it is always significantly shorter than the working life of the asset, hence it is more like a regular rental. The lessor expects to be able to either sell the asset in the second-hand market or to lease it again and will therefore not need to recover the total asset value through lease payments. There may be an option to extend the leasing period at the end of the initial rental period. As with finance leases, you will not be able to become owner of the asset at any time but, contrary to financial leases, you will not share in the sale proceeds.
Contract Hire.
A form of operating lease (often used with cars and other vehicles) that includes a number of additional services such as maintenance, management or replacement if the asset requires repair.
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