Variations of Leasing
There are two main types of lease agreement, finance (capital) or operating. Every lease you sign will be differentiated as one of these two – i.e. if it’s not a finance lease, then it will be categorised as an operating lease.
However, there are variations on the traditional lease agreement within the categorisations and, depending on your lessor’s willingness, you may have the option for additional elements. Although these lease agreements may have different names, features and perks for the lessee, they are still categorised as either finance or operating. Here are some of the more common variations on the traditional lease agreement and what can offer:
Hire Purchase/Lease Purchase
If a company has identified that they may wish to retain the assets after the initial lease period, they are effectively looking for a deferred purchase and a Hire Purchase contract may be a more preferable method of financing. In this variation of a traditional agreement, the cost of the assets are spread over the life of the lease and include the option to purchase for a nominal sum at the end of the period.
Although categorised as a lease, a hire purchase agreement has similar features to a deferred payment deal; the lessee pays the VAT of the assets upfront and spreads the rest of the costs over a pre-determined period, after which the full cost of the asset has been paid off and the ownership rights are transferred to the lessee for a nominal fee. This way the lessee can guarantee they will have an option to purchase the asset, but is able to avoid high payments appearing on the cash flow whilst still getting to use the assets for their full potential.
The main feature of a Contract Hire agreement is that the contract will include maintenance. The amortised payments will include two elements; one that pertains to the finance and the other that relates to the additional maintenance costs.
What is vital here is that you, as the lessee, are aware of how these costs are split so that you can still make the financial calculations as to whether you are getting a good deal. By its very nature, contract hire can create bad visibility and it is easy to assume you are getting a bargain, which may not be the case. Be sure to consider these charges separately and keep an eye out for any “smoke and mirrors”.
Sale and Lease-Back
This form of agreement is another variation on the theme; there is still a lease involved, but the initial method of where the lessor acquires title to the asset is different from a traditional lease agreement. In most cases, the lessor sources the equipment from a manufacturer/supplier, specifically for a customer. However, in a Sale and Lease-back arrangement, then lessee already owns the assets. The lessee sells the asset to the lessor, passing on legal ownership and title. The equipment is then leased back through an operating or finance lease. The method of procurement does not affect the type of lease, only how the assets are acquired and can help in a variety of situations, but its key feature is that it has a direct impact on the cash flow and frees up cash tied up within the assets.
Overall, it is important to remember that the terms of your lease are determined by your relationship with your lessor. As long as it does not contradict any legal requirements, you may be able to negotiate a number of additional features into your lease contract. In order to get the best deal to suit your company, you should consider consulting a leasing specialist who will have a better idea on how to negotiate the most suitable terms and features into your deal.
Share this Blog?