Ryan Hendrie
5 minutes length
Posted: 16th May 2017

Should I Lease? When Should Companies Consider Leasing?

Should I Lease - When Should Companies Consider Leasing.png

The reasons for leasing equipment can vary from company to company. However, what all those who use leasing share are the great advantages and opportunities that leasing assets offer to a business. 

This is why the leasing industry and equipment leasing in particular has grown enormously in recent years. If you’re wondering when to lease or the positive reasons for leasing, this post should help.

 

First, What Is A Lease?

A lease is an agreement between a lessor (the provider) and their lessee (the user) which sees the latter pay an agreed financial amount to use the former’s asset for a set amount of time.

For lots of intents and purposes, the lessee gets to treat the asset as though it is their own. For example, another lessee cannot come and claim use of the asset if it is sitting out of use at the first lessee’s premises or the lessor can’t typically withdraw use of the asset (subject to conditions, obviously).

The lessor benefits from the arrangement by generating income from their asset portfolio which is greater than the initial outlay cost of procuring it. They also count on other factors for their profit, such as lessees auto-renewing into new lease periods or having to pay profit generating charges, for things like damage or misuse of the asset, at the end of the agreement.

The lessee benefits by gaining access to the assets they desire without full ownership responsibilities, such as having capital tied up in an unsellable asset once it is no longer needed, for example.

All sorts of business items can be leased, from airliners to vending machines.

 

Why Do Companies Lease?

Fewer Ownership Responsibilities

Cash Flow Benefits

Ease Of Disposal

Easy Replacements

Latest Or Best Spec Equipment

 

Fewer Ownership Responsibilities

Whilst the lessee does not own the asset, they do benefit from having full access to the asset as long as they pay the agreed amount on time and keep the legal owner (the lessor) aware of the asset’s location.

This means they aren’t responsible for the costs of disposal or selling on of the asset when it is no longer needed. Neither are they concerned with the written down or actual value of the asset at end of life.

 

Cash Flow Benefits

In a similar way to domestic customers purchasing their first new car on finance, leasing allows companies to manage their cash flow more effectively than purchasing outright. Leases can be treated as a monthly operational cost as opposed to a one-off purchase or loan repayment, in the sense that your lease budget is known for the period of the agreement.

As the lessee, you will likely be responsible for the initial choice of the asset and on-going maintenance of the same but upgrading and swapping out may be easier.

But, more beneficial, is the ability to effectively spread the cost of assets more favourably.

Some lease agreements allow delayed payment structures, so new companies can use the assets they need to get the business functioning, but they won’t start making cash payments until X-months down the line, once the money is coming in.

Whereas other agreements can have termly payments which reflect the income derived from the asset during a particular period. Something which is particularly handy for seasonal products which see peak use and profit generation at different, scheduled times of the year.

 

Ease Of Disposal

And for this reason, the lessor being the legal owner, it’s easy for you, the lessee, to dispose of the asset at the end of the agreement. As long as the usage criteria have been met and the asset meets the completion criteria, it’s as simple as handing the asset back.

Any environmentally friendly disposal issues or the hard work of finding a new buyer are the lessor’s problem, not yours. Likewise, there is no issue with written down value write off or recognition.

 

Easy Replacements And Latest Or Best Spec Equipment

Whilst you as the lessee are free to evaluate and identify suitable replacement assets you may additionally have the choice of sourcing the asset while the lessor will procure it. Likewise, sourcing replacement assets is the responsibility of the lessor. And lessors need to stand out from their competition by offering the best possible assets for the most favourable price.

The more the industry has grown, it’s the lessees who have benefited most of all. As the leasing industry has matured, the quality of options available has grown with it.

 

How Do You Know If Leaseing Is Right For You?

Leasing is of course not free from risk. Everybody has heard the horror stories of lessees being faced with exorbitant charges at the end of their agreement. A routine run of the mill stone chip on a car, for example, if you believe everything you hear, results in having to pay for a full bodywork respray.

But all of the worries with leasing can be managed and mitigated by conducting thorough and comprehensive research of a lessor before entering into an agreement and only signing into an agreement for which you are confident you won’t fall foul.

As for knowing if leasing is right for you, you need to decide on whether you are in a position to take advantage of the following issues.

  • Will you be confident that use of the asset you will be leasing will generate enough extra profit to make the payments?
  • Will you be able to meet the return criteria at the end of the agreement? Is the asset suitable for a lease arrangement – a bed might be but a mattress certainly isn’t. The costs of sanitising and restoration would be prohibitive.
  • Can you definitely not acquire the same or similar assets on the open market, for a cost smaller than the total cost of the agreement even allowing for the cost of money?
  • Or are you looking to spread the cost more evenly from month to month as a way of not exhausting your current cash levels or as a way of balancing expense and income?
  • It’s unlikely you’ll be leasing just one asset – can your company support the close management of a lease portfolio without running the risk of wasting spend?

All of these questions are what you need to consider when deciding if leasing is right for you.

Understanding The Core Principles Of Leasing.

If you’d like some further reading on leasing and the associated business benefits; as well as how effective lease management can help deliver ROI and savings, then check out this guide to leasing basics.

{{cta(‘5f3e7944-005f-4386-9392-b54510d1313b’,’justifycenter’)}}