A Helpful Guide for the Lessor and the Lessee
What are the advantages to leasing?
Whether you are a lessor or a lessee, this guide explains the many ways leasing can help companies better manage business operations, systems, solutions and capital more effectively.
Benefits of leasing assets or offering leasing
Conservation of Capital
With a lease, a customer’s (or lessee’s) capital isn’t tied up in equipment or system costs. It’s free to be spent on other items such as additional office space, training or personnel.
Leasing allows customers to finance up to 100% of the equipment cost plus certain “soft” costs such as maintenance, delivery and insurance right in the lease, minimizing up-front cash requirements.
Customers can lock-in payments now while avoiding the risk of rising interest rates in the future and simplifying the budgeting of monthly cash flows.
Leasing allows customers to structure payments to fit their budget. We offer a variety of traditional and customized structures to meet a customer’s needs.
Easier Cash Flow Forecasting
Fixed monthly payments help customers budget money into the future.
Purchase and Renewal Options
At the end of the lease, customers may choose to purchase the equipment, upgrade to a new system or continue to lease via an ongoing renewal of their contract.
Leasing keeps equipment and systems up to date. As a business grows, the equipment or technology may become obsolete or outdated. Leasing offers customers the flexibility to upgrade to new and better technology to match their current and future needs.
Leasing allows customers to deduct monthly lease payments on a true lease as an operating expense.
Off-Balance Sheet Financing
In some instances, customers may be advised to keep their equipment “off-balance sheet.” Depending on the lease structure and the accounting treatment, a lease may qualify for off-balance sheet treatment which may assist them in acquiring the equipment they need while:
- Maintaining compliance with bank and loan covenants
- Staying within capital budget constraints
- Improving their financial position
- Preserving their credit
- Keeping lines of credit open and available
- Having more disposable capital as needed
Why Organizations Use Leasing to Their Advantage
The benefits associated with leasing are mostly economic. However, many times an organization will justify leasing for convenience.
- No Down Payment is Required – A bank loan, for example, usually requires a down payment. Payments are based on equipment cost less any down payment. A lease requires no down payment and in the case of a Fair Market Value (Operating Lease), the residual value is factored into the lease, resulting in lower lease payments.
- No Large Initial Outlay of Cash – When using cash to purchase equipment.
- Conserves Working Capital (working capital is current assets, less current liabilities) – You typically don’t want to use working capital for medium-term financing needs.
- Tax Benefits – Benefits are transferred from lessor to lessee.
- Structured Leases – These leases are available to help manage budgeting cycles and meet cash flow needs – a step lease, for example.
- Bundles – You can bundle hardware, software, and services into a lease.
- Leasing is a Hedge Against Technology – Particularly with respect to operating leases where the lessor takes a residual position, the burden of technological risk is borne by the lessor. At the end of the lease term, the lessee has the option to return the asset. If the then fair market value of the asset is less than the residual that the lessor assumed, the lessor bears this loss.
- The Lessee is Protected – They are protected from fair market value fluctuations on any equipment, not necessarily high technology equipment, where the lessor assumes a residual position.
- Technology Refresh – If the lessee chooses to swap the asset for one of newer technology, the existing lease may be terminated, and a new lease initiated.
- Faster Response Time than Loans – Banks are regulated, causing them to be much more cautious. This could cause delays in loan processing. Typically, a lessor’s process for approving a lease request is a much simpler process that includes the client completing a one-page lease application and the lessor performing credit check.
- Master Lease Agreements – This makes follow-on transactions much easier. The lessee would not need to negotiate new lease contracts when acquiring additional equipment.
- Flexibility at End of Term Options – Lessee can select from following options:
- Return the asset
- Purchase the asset
- Renew the lease
- Leasing can not only help an organization manage its cash flow, it can also improve financial reporting by keeping purchases off the balance sheet and improving the income statement.
- Leasing can also be used as a hedge against advances in technology. A company can use leasing to upgrade new technology on a timely basis.
- It is often more convenient to lease rather than purchase by taking advantage of the speed of processing a lease and the flexibility of terms within a lease.
- When considering the financial aspects of leasing versus purchase, leasing is many times less expensive.
Dynamic Funding, Inc. has financial modeling tools that can help you evaluate lease versus purchase options using your financial information or your customer’s financial information. It is best that we are involved at the outset of the acquisition process to ensure you or your customers have all the right information with respect to leasing.