Leasing Companies:Basic Purpose of Leasing, Technological Benefits

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Management of Financial Institutions - MGT 604

Lecture # 33

Leasing Companies

1. A lease or tenancy is a contract that transfers the right to possess specific property. In

law, there are two types of property: historically, land is the more important because, under

normal circumstances, it holds the highest value in economically developed societies.

Ownership of land is an aspect of the system of real property or realty in common law

systems.

2. When structured as an operating lease, this is a form of financing that avoids the down

payment usually required for the purchase of equipment. Because leased equipment is not

owned by the company, it does not appear on the balance sheet. A financing lease does

appear on the balance sheet.

3. Don't be intimidated! For most people, leasing is an unfamiliar concept and therefore a

little scary, but leasing isn't any more difficult than purchasing a car. Fully understanding

how the leasing process works is the first step toward a positive leasing experience.

Leasing a vehicle is similar to renting a car, just for a longer time period. Like renting a car,

a person who leases pays a pre-determined rate to drive a vehicle for a pre-determined

amount of time. You never own the vehicle and return it when your lease is up. A person

who leases enjoys the benefits of driving a car without assuming the up-front costs, and

many of the risks of ownership.

Basic Purpose of Leasing

Bargain Purchase Option

A lease provision allowing the lessee, at its option, to purchase the equipment for a price

predetermined at lease inception that is substantially lower than the expected fair market

value at the date the option can be exercised.

Broker

A company or person who arranges, for a fee, transactions between lessees and lesser of an

asset.

Certificate of Acceptance

A document whereby the lessee acknowledges that the equipment to be leased has been

delivered, is acceptable, and has been manufactured or constructed according to

specifications.

Economic Life

The period of time during which an asset will have economic value and be usable.

Effective Lease Rate

The effective rate (to the lessee) of cash flows resulting from a lease

Technological Benefits

Technology provides a needed and powerful edge in business; the following points examine

those benefits and let you decide how these benefits provide you with the needed edge in

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Management of Financial Institutions - MGT 604

business. An equipment leasing arrangement provides you the edge you need without

running the expensive costs associated with purchasing state-of-the-art equipment.

Wider Options, Lesser Costs

With equipment leasing arrangement you are free to select your choice of equipment

without paying the full price. This advantage also comes with the fact that most business

equipment leasing companies will often handle everything from the maintenance to the

deployment of their equipment. Your company can save the costs associated with the

equipment as the leasing company usually gets price cuts on equipment and related services

since they buy in bulk.

Leasing Companies

Leasing has become increasingly important over the last few years. Uncertainty about future

tax legislation and strong pressure on costs in bulk business are the controlling factors in the

industry. A high level of product and market homogeneity for classical products, at the

same time as low customer loyalty, is forcing companies to adopt positive distinguishing

signs in the market.

Leasing Act

Leasing acts as a "hedge against inflation." Lease payments are fixed for the full term of the

lease and, therefore, not subject to inflationary increases. New equipment obtained today is

paid for with tomorrow's Rupees. A fixed lease payment enables you to effectively budget

and manage the acquisition of capital equipment. At the end of the lease, you may choose to

exercise the agreed upon purchase option or simply return the equipment. Leasing offers

you the most manageable and economical way of keeping up with evolving technologies. A

lease payment may include installation charges or other related out-of-pocket expenses.

Down payments are seldom required. Leasing helps establish additional credit resources for

your business. Current working capital is not used, which allows your business to use the

cash for other investments or possible expansion. A lease is a simple and economical way to

obtain the benefits of the latest technology without assuming the up-front costs, and risks, of

ownership.

Simply defined, a lease is a usage agreement between an equipment owner and a user of that

equipment. The lessee pays a periodic fee, usually monthly, to the lesser for the use of the

equipment. Leases most often take the form of written contracts with specific terms and

conditions spelled out: length of term, amount and timing of payments, and any end-of-lease

conditions or restrictions. The lesser is usually viewed as the owner of the equipment during

the lease term, but depending on the type of lease you select either you or the lesser may be

able to claim the benefits of ownership for tax purposes. Regardless of which type of lease

you choose, the future expected value of the equipment (the residual value) is considered

when pricing most types of leases. The residual value is the lesson's estimate today of the

equipment's value when the lease term ends. Or in other words we can say that it is like

purchasing a car, a car lease typically lasts for 24, 36, or 48 months; the longer the lease the

lower the monthly payment. However, it's usually smarter to get a shorter lease. Your best

bet is to get a lease for the same amount of time the car is under warranty. Doing so insures

you are covered for most car problems for the entire time you are leasing the vehicle.

Statistics show most cars begin experiencing problems after being driven for 4 years;

therefore a lease term longer than 48 months should be carefully considered. Cars begin to

lose value immediately after purchase and continue to lose value until they are scrapped.

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Management of Financial Institutions - MGT 604

They become less desirable as they accumulate wear and tear or are replaced by newer

models. This process is called depreciation. The cost of your lease depends on the expected

depreciation of the vehicle you are leasing. All cars have an expected depreciation. In other

words, before a car is leased for the first time, a dealer knows the vehicle's value, given

normal wear and tear, for each year after it leaves the lot. When leasing, the difference

between a car's original value and its value when the lease term is over, determines how

much will be paid during the lease. When leasing a car, you should have a clear

understanding of the vehicle's depreciation schedule. Some cars lose value faster than

others. For example, some local brands are usually bringing better lease rates than many

foreign brands because they are known to have low depreciation. Before leasing make sure

you understand both the car's original value and its projected value at lease end, called the

residual value.

Leasing in Europe and United States of America

The global technology equipment leasing market is worth an estimated US$25 billion a year

and continues to grow rapidly. Currently, the Europe claims the lion's share of the market.

The concept is more deeply ingrained in the American culture where renting cars, houses

and even furniture is the norm. And, because it is so much part of the mainstream, US

businesses have historically been more receptive to the leasing message than their European

counterparts. The US is also more homogenous than Europe, in terms of both business

culture and financial and regulatory frameworks. However, largely because the business

arguments in favor of equipment leasing are so compelling, the market is now beginning to

take off in Europe. This article looks at the benefits of leasing and the reasons why IT

directors and facilities managers across Europe are increasingly adopting this method of

financing the acquisition of new equipment. With US-based equipment leasing companies

establishing a stronger presence in the region, more European businesses are being educated

on the advantages of this approach to asset finance. One of the most important benefits is

that leasing helps companies conserve cash.

Paying cash for equipment, or even making large down payments, can deplete reserves and

ultimately even lead to the business failing, if insufficient reserves are available to pay off

creditors on demand.

In contrast, leasing enables customers to retain their cash, by eliminating the need for down

payments. Many leasing packages provide 100 per cent financing and even cover "soft"

costs like shipping, installation and training. In addition, there are no application fees.

Instead, businesses are able to make affordable, flexible monthly payments. Today, leasing

options exist that let users design a financing plan around the needs of their business,

whether their priority is guaranteed ownership; the flexibility to return equipment; specified

purchase options or varying monthly payments to match seasonal cash flow. Customers can

even convert a recent purchase to a lease. To make certain their move into technology

equipment leasing is a success, businesses must also work with providers capable of

developing financial products tailored to their precise needs no matter the region in which

they are operating. Drawing on expertise gleaned from its long-term presence in 15

European countries, Key Equipment Finance is well positioned to do just this.

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