Leasing capital goods is an alternative to foreign funds. It is particularly well suited to dynamic companies, with low equity levels.
The leasing firm makes equipment available to the company in return for a monthly payment. The leasing firm retains ownership of the asset. Such contracts generally contain a purchase option which allows the lessee to acquire ownership of the equipment at the end of the lease, at a price fixed in advance.
While the leasing of capital goods is mainly an alternative to an overdraft facility or a loan, this type of arrangement is also offered as an alternative to fixed-term advances or even fixed-term credit, for larger volumes.
Leasing is particularly suitable for dynamic companies with a high return potential but low equity levels, as they have no access to cash or foreign funds. In addition, leasing payments are tax deductible.
However, this should be contrasted with the fact that the life cycle of the leasing object is limited. Leasing is also expensive, as leasing firms base their prices on the refinancing costs, the relatively short depreciation time and administrative costs; they then add a variable risk and profits supplement. Finally, current revenue decreases with leasing (and with factoring), which means the return value of the company is also reduced.
Checklist: advantages and disadvantages of leasing
Leasing offers a good solution to protect the company's liquid assets. But it also involves many additional costs.
- Protects the company's liquid assets.
- Makes planning the budget and calculations easier.
- Simplifies the balance sheet and improves equity yields.
- Boosts liquidity reserves for refinancing/expands basic activities.
- Leasing costs more than borrowing capital (leasing payments entail refinancing costs, short depreciation times, administrative costs, a profit margin and additional risk premium).
- Leasing rates must always be paid, even when the business is going badly.
- In the event of an early exit, high exit fees are charged.
- Current inflows are reduced, meaning that the company’s return value is also reduced.