How Leasing Can Help A Business's Bottom Line
There are a lot of reasons that the leasing industry has seen such exponential growth in recent years. A combination of several factors has resulted in the vast majority of businesses managing leases in order to gain use of “their” assets.
But whilst they get to use the assets as though they are their own property – and this includes everything from coffee machines to passenger planes – they have few if any of the ownership responsibilities and can take advantage of other financial benefits too.
All of these factors, which will be explained in further detail, mean leasing can help a business’s bottom line. From reducing risk to improving cash flow and enhancing day-to-day efficiencies; this is how leasing can help increase your company’s profits.
How Leasing Helps Your Bottom Line:
The ways in which your leased item helps contribute to a healthier bottom line depends on the asset itself and who you are leasing it from. There are various types of agreement and providers on offer and it’s likely that your company will end up managing leases from lots of different sources.
Keeping well on top of your lease portfolio management, however, will ensure you get the maximum benefit to your bottom line from your agreements.
Leasing From A Manufacturer Or Their Merchant Suppliers
Probably the most familiar type of lessor to companies, this is the same party agreement as you will be used to in your personal life. Like when you may have leased your personal vehicle or domestic goods in the past, B2B lease agreements can be made directly with a manufacturer or their supplier/merchant.
This can help improve your bottom line by minimising the handling and administration costs between the asset being produced and your company paying to use it. This should result in more competitive quotes – especially if there are multiple manufacturers and suppliers of the same leasable assets; e.g. the commercial leasing arms of Ford and BMW competing to win your business’s company vehicle contract.
The closer your agreement is made to the original manufacturer means the more knowledge they will have of the asset and the easier they’ll be able to facilitate repairs, maintenance and replacement parts – with a lower cost too.
All of this contributes to a more economically efficient agreement which feeds into your bottom line success.
Leasing Bank Owned Assets
Given the sums involved with some of the assets available to lease and the duration of agreements for heavy plant and other machinery (in fields such as real estate, manufacturing, construction, aviation, etc), it’s no surprise to see financial institutions entering the leasing industry and offering asset finance to their clients.
The benefit to your bottom line of using your bank to facilitate lease agreements is that your lease portfolio management (or at least this particular part of it) forms part of your general credit agreement and performance. It’s also easier to establish your lease agreement as you’ll be a valued customer of the bank already and can often negotiate more favourable terms of a lease agreement than you would if you were approaching them as a cold customer.
Leasing From An Independent Lease Provider
However, you may wish to keep items separate from your credit provider or they may not be able to offer finance on the assets you wish to lease. Likewise, it can be an easier management process to have an independent lease provider who can provide most if not all your lease portfolio, as this will reduce the number of providers you work with and make admin easier.
This kind of setup helps you to improve your bottom line success by making the administration and lease portfolio management more efficient, as your team will only be dealing with the one company.
The cost of your full lease portfolio can often be lower when using dedicated, independent lease providers because sourcing finance for efficiently priced assets is how they stay in business. As the leasing industry has grown, this has been great for the customer side of the market because suppliers have had to work harder to stay in business.
This can be through lowering the cost of lease agreements – which directly helps you financially – or by offering superior assets and service – which indirectly helps by improving your operational performance.
All of this, of course, depends on proper lease management to make sure you meet your responsibilities and maximise your benefits as the lessee in an agreement.
What The Lessee Needs To Do To Make Sure Their Leases Help Their Bottom Line
There are some basic best practices which will ensure you only experience the benefits of leasing to your bottom line and don’t suffer the financial penalties which lease providers have a (somewhat unfair) reputation for thriving upon.
But there are financial benefits that a lessee can take advantage of in order to make sure their leases help their final profit margins. There are lease accounting and financial reporting benefits to leasing which make them a far more favourable option than purchasing assets. Lease agreements allow term-to-term certainty of expenditure which facilitates better financial planning.
Leasing also offers access to a quality of asset which is more cost effective than direct or hire purchase agreements. For illustration purposes, a £1,000,000 purchase price asset might be available for immediate use for termly payments in the thousands of pounds instead. But the lessee has use of the items immediately and isn’t tied into a loan agreement which lasts longer than the asset itself.
But moving back to more practical ways to make a lease help your overall profits. You must keep the assets in good and proper condition as a matter of course. The asset is not your owned property but treat it as if it is because the provider of your lease will resume full ownership responsibilities at the end of your agreement. This is a common objection of all domestic users who are reluctant to use leasing for goods or property; “Yeah, but they always overcharge you for any damage whatsoever at the end of your agreement.” But properly looking after leased assets will completely negate this risk.
Only using it for the intended purpose and with the prescribed techniques of use will go a long way to making sure you meet that goal. It may be tempting to use certain assets for other purposes than originally intended – overusing them, skipping scheduled maintenance in order to pinch a small win – but it’s detrimental in the long run. It runs the risk of end of agreement penalty costs or taking redemptive measures, both of which may negate any benefit of leasing on your eventual bottom line.
Organising the end of lease agreements properly and managing lease agreements through to their satisfactory close is another way to ensure your lease portfolio is contributing to your bottom line in a positive way.
As alluded to, lease providers need to make a profit in any way possible without compromising the experience they offer. Auto-renewals is one of many ways they do this, but proper management of agreements at your end can negate these risks to your bottom line. This includes paying all rentals on time and keeping up with all of the small print terms and conditions of your agreement.
This may suggest that lease agreements are full of risk and potential financial hits. But this isn’t true.
Remember, the leasing industry has grown in popularity for various reasons and will benefit your business if you use the model to your advantage. Don’t be put off but follow this summary advice and you can use leasing to your advantage:
- Negotiate the most favourable lease agreements possible by tendering a wide range of providers from different backgrounds (manufacturer, supplier, bank, independent lease provider). Look at whole life costs!
- Ensure close management of your lease portfolio and consider paying for a lease management service or software to facilitate this.
- Keep up with rental payments and maintenance schedules, and any other terms and conditions of an agreement, in order to make sure the asset can be returned without penalty charges.
- Take advantage of the cash flow benefits offered by leasing assets as opposed to purchasing.
- Use reporting and accounting benefits (though be aware some of these are being tightened with changes to international lease accounting standards).
If you’d like to continue reading about leases and how they can help your business, check out our introductory guide to the benefits of leasing. Press the button below.