Leasing
Lease Is More
In today's rapidly expanding market, companies are increasingly aware of the financial options available to them and the benefits each option delivers.
There are three basic methods of purchasing products - cash, loan or lease.
For some companies, paying cash may be the best option but, in an increasing number of cases, this could leave the company short of funds and particularly for newly launched companies, cash could often be better spent in other areas.
A loan may be an alternative for business struggling to deliver the capital for new equipment outright, but often in a volatile market, by the time the loan is repaid in full, the value of the equipment, has significantly depreciated.
Consequently, many companies are increasingly turning to leasing as their preferred option. It frees up working capital, allowing investments to be made in high return opportunities and can preserve credit lines for other areas including payroll and inventory.
Case for leasing
In certain cases, leasing structures allow monthly payments to be treated as operating expenses, bringing fully deductible benefits. Often, 100 per cent of the purchase price can be financed, and the convenience of leasing, with minimal documentation and simple payments, can surpass all other methods.
Flexible financing options, including custom-tailored billing cycles designed to match cash flow and budgetary requirements, are available and, for the majority of leasing customers, this flexible customer focused method of payment is reason enough not to purchase outright or to take on a costly, long-term loan.
There are three primary methods to lease- contract rental, lease purchase and finance lease. Each brings its own advantages and offers customers flexible choice.
Contract rental
Essentially a rental agreement based on a period of time, the assets of a contract rental type of lease always remain the property of the lessor.
At the end of the term, the lessor removes the financial burden of calculating the value of the assets by adjusting rentals throughout the term of the agreement accordingly. Finance is provided cost-effectively, without the usual risk of ownership.
Lease purchase
Lease purchase differs from the above method in that the asset can be purchased at the end of the agreement. Taken out over a period of up to seven years, it provides budget flexibility.
Provided that the assets are eligible and that the business qualifies, this solution allows the lessee to claim the tax benefits of 'writing down allowances.'
The writing down allowances, currently 25 per cent per year, can be taken on plant and machinery and be offset as a business expense against the profits of the company, reducing corporation taxation.
Finance lease
This option covers the full value of equipment, including interest. Fixed rentals are spread throughout the agreement period, with the assets remaining the legal property of the lessor during this time- thereby removing the benefit of 'writing down allowances.'
The lease can decide to extend the lease at the end of the period, when a further agreement will be arranged, with significantly reduced rentals, taking into account the fact that the assets have been fully financed over the initial term. These rentals are often known as peppercorn rents or extension rents.
Payment structures
For each of the previous solutions, special payment structures can be designed for customers. One solution is graduated payments. These are ideal for expanding businesses, which will have a stronger cash flow to pay higher payments at a later stage. Stepped maintenance allows customer rentals to be fixed with the maintenance element reflected in costs. This solution includes early settlement quotations, allowing easy upgrades. Finally, deferred payments allow companies to get equipment up and running prior to the commencement of financial payments. This is an ideal solution for customers looking to budget equipment in future years. Each option allows payments to be made in advance or arrears.
Is outright purchasing of new machinery and equipment
always the best policy?
LEASE IS MORE
Advantages of contract rental include:
Off balance sheet finance- no need to capitalise assets .
Fixed payments for term of agreement.
Lower rentals than comparable finance lease.
Fixed- price advantage.
Maintenance can be included in monthly payments.
Advantages of lease purchase include:
'Writing down allowances'
Ownership of equipment at end of agreement for fixed purchase option .
Upgrade facility during term of agreement.
Fixed payments.
Advantages of a finance lease include:
Seven year term to fit funding requirements.
Easy upgrade capability under lease.
Fixed payments.
Continued use of equipment at low cost after initial period.
Cash flow benefits of long-term installation.
Ancillary services can be included
