Advantages of Leasing
Leasing as a factor in entrepreneurial success
It is the utilization of an asset rather than its ownership that generates income. This is the core principle of leasing, and the idea that closes on fifty years ago challenged the orthodox view that ownership is nine tenths of sound commercial planning and practice. And although leasing companies can now offer their customers all kinds of specialized agreements and supplementary services, the core financial service they have developed and refined can still be traced back to the underlying principle stated above. But it is also clear that the advantages afforded by leasing are as numerous as the variations of the basic idea that have been worked out over the decades:
Leasing Creates Room for Investment
Market analyses indicate that companies consider one of the major advantages of leasing to be the clear overview it provides of the extent and scheduling of investment costs. In its efficacy, leasing is comparable with 100-percent external financing, which in the real world of credit transactions is simply not on offer. Leasing instalments can be repaid out of the revenue generated through the use of the leased asset in a kind of “pay-as-you-earn” arrangement. This minimizes their effect on liquidity, and leaves existing credit lines intact. Leasing thus creates financial leeway for new investments, and improves balance-sheet ratios.
Dependable Costing and Optimized Scheduling of Repayments
The cost of repayments over the basic lifetime of a leasing agreement can be calculated in advance, since leasing instalments are not subject to changes in interest rates, or to any of the other vagaries of the prevailing economic climate. Furthermore, repayment schedules can be defined in accordance with a company’s earnings expectations.For example, it would be perfectly feasible for lessor and lessee to agree to a non-linear repayment schedule designed to optimize the results that appear in a company’s profit-and-loss accounts.
Keeping Plant and Equipment Up to Date
Since leasing agreements are time-limited, companies always have the option of replacing obsolescent investment assets with the latest, state-of-the art equipment and systems. Rates of technological advance are becoming more rapid, and less easy to predict, and innovation cycles are becoming ever shorter.This is particularly true of the IT and medical-technology sectors. When, as is generally the case, the operational life expectancy of a leased asset exceeds the duration of the leasing agreement, the risk of goods becoming obsolete during the lease period, and of financing losses, is significantly reduced.
Leasing companies offer individualized agreements that take account of the lessee’s special requirements on the one hand, and the changing value of the leased asset on the other. Defining terms that ensure maximum contractual flexibility is the prime consideration when the length of lease periods and the modalities for the termination of the leasing relationship – and, in particular, what is to become of the object leased – are negotiated. Purchase options and the renewal of existing agreements are just as feasible as allowing the lessee a share of the proceeds when a leased asset is sold on after the leasing agreement comes to an end. Many companies appreciate being able to return the item leased to the leasing company, which then assumes full responsibility for the remarketing of the item in question.
Positive Effects on Balance Sheets and Credit Ratings
Leased assets are the property of the lessor, and thus make just as much or as little impact on the balance sheet as the lessee’s obligations under the terms of the leasing agreement. This balance-sheet neutrality improves various key balance-sheet ratios – in particular, it should increase a company’s own-capital ratio, which, with the advent of Basel II, has become an increasingly important consideration. Companies that use leasing as a financing tool have a head start when it comes to obtaining a good credit rating.And at present that is the key to raising capital at an affordable rate of interest.
Accompanying Services Save Time and Reduce Costs
Leasing agreements comes into their own when they include additional service modules. Maintenance packages, insurance, and even full-service contracts (e.g. for vehicle fleets and IT equipment) frequently form a part of equipment leasing agreements, while facility-management, planning, and project-management services are commonplace components in real-estate leasing contracts. The provision of such services allows companies to outsource all kinds of investment-related activities. Leasing companies possess highly specialized skill sets and maintain structures designed specifically to facilitate the provision of financing services. They are therefore usually better placed than individual lessors to manage investment projects cost-effectively and efficiently.
Guidance and Support in Germany and Abroad
The investment and capital-market expertise of the German leasing sector is not restricted to domestic markets. More and more German leasing companies are setting up operations in neighbouring European countries, where they are represented by subsidiaries, local branch offices, or co-operation partners. This is enabling them to support company customers wishing to expand their international sales and production activities. The consultative support and the wide-ranging practical solutions offered by the German leasing sector are enabling internationally active companies to develop effective investment and financing strategies on both sides of the German border.
Meeting Future Financial Challenges with Leasing
The characteristic advantages afforded by leasing are what make it so strategically attractive to forward-looking companies. Leasing is flexible, has a relatively small effect on liquidity levels, and can improve both balance-sheet liquidity ratios and credit-rating prospects.By outsourcing the investment process to leasing partners, companies can create for themselves the financial freedom they need to prosper in a fast-changing world.