What You Always Wanted to Know about Leasing

As the Germany leasing industry’s central public-relations body, the BDL has to deal with all kinds of leasing-related questions on a daily basis. Some of the most frequently asked questions (FAQs) are dealt with below by Dr. Claudia Conen, BDL Secretary General. 

 

Question: Is it true that without leasing several types of investment that boost economic growth would simply not be feasible?

Dr. Conen: Leasing companies are investment specialists.They possess all-round expertise in the management of investment projects, and they have a clear understanding of how the markets for capital goods function. Leasing companies are thus better placed to assess levels of risk than banks, which means they can provide their customers with investment-financing tools that credit institutes wouldn’t even consider. When credit is hard to come by, as is currently the case, leasing tends to encourage investment, and national economies benefit significantly from this.

Question: So what types of investment goods can in fact be leased?

Dr. Conen: Leasing companies are constantly developing innovative financing products, and these days there are hardly any types of economic goods that are not, in principle, leasable. Vehicles, machinery, computer hardware and buildings are just some of the classic examples of movable and immovable assets that can be leased, but leasing solutions also exist for the acquisition of intangible assets. The range of assets classified as intangible is wide-reaching, and covers everything from brand rights, patent rights and software to R&D projects in need of advance financing. Nor should we forget the role leasing has played in the marketing of new technologies such as renewable-energy and solar-power systems. The prerequisite for a leasing solution is that the asset in question be re-marketable. In other words, the leased asset should be something that can be put to commercial use not only by the lessor, but, potentially, by third parties as well.

Question: What magnitudes of investment can best be financed through leasing? Are there upper and lower value limits?

Dr. Conen: In principle, leasing can be used to finance investments of any magnitude.All kinds of movable and immovable assets can be leased.If it’s a commercial vehicle you’re looking for, you can have anything from a van to a forty-tonne truck.If it’s manufacturing equipment you need, leasing companies will be just as keen to draw up a contract for a single CNC machine as for an entire production line.If it’s IT equipment you want, leasing companies will offer terms on anything from a desktop computer to an enterprise-class resource-planning network.It’s the same with property:high-rise office buildings are as leasable as warehouses. The leasing industry caters for every market sector.Some companies specialize in “small-ticket” items; others concentrate on the “big-ticket” end of the market. Leasing companies are continuously and systematically improving their acquisition and processing procedures, which means leasing is becoming more and more attractive as a financing tool for the acquisition of relatively low-value assets.

Question: What happens when a leasing agreement comes to an end? Does the lessee have to acquire the item he has been leasing?

Dr. Conen: The flexibility of leasing is virtually limitless. Leasing companies offer a wide range of agreement types, so it’s up to the customer to select the package that suits him best. Agreements which provide for the straightforward return of the asset to the leasing company are just as feasible as agreements that provide the lessee with the option of buying the item in question outright, or leasing it for a further period. That means the lessee can choose between leasing a more up-to-date model in order to keep up with the latest technological advances, or simply continuing to use his asset after the expiry of the lease period.

Question: What are the advantages of leasing?

Dr. Conen: One of the key advantages is the transparent overview that leasing provides when it comes to planning an investment and assessing its cost. 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 minimizes their effect on liquidity, and leaves existing credit lines intact. What’s more, it tends to enhance the appearance of balance sheets.

A further attractive aspect of leasing is that it enables businesses to invest in the very latest equipment. Investment cycles are becoming shorter and shorter, and technologies are being very quickly superseded. 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.

Question: What role does the provision of services play in leasing?

Dr. Conen: Long gone are the days when leasing was just a matter of placing an asset at the lessee’s disposal. Leasing companies now offer all kinds of value-added extras such as maintenance and repair guarantees, and damage management. Attendant service components such as maintenance, repairs or damage management, which are also offered by leasing companies, relieve the customer in many ways. This enables the customer to focus on the core business. Full-service vehicle leasing is a good example: Lessors can offer their customers maintenance and repair packages, damage-management services, mobility guarantees, fuel credit cards, replacement tyres, insurance cover, support with vehicle-tax and radio-licence payments, and, of course, vehicle-fleet management and financial-reporting services. The leasing of property is another good example.The services leasing companies can provide range from project planning and control to property surveillance and facility management after a building is brought into service.

Question: More and more German companies are investing abroad. Is the country’s leasing sector also looking further afield?

Dr. Conen: The international business transacted by the member companies of the BDL has increased steadily over the years. In particular, the eastward expansion of the EU has opened up markets with enormous growth potential in Central and Eastern Europe. Leasing companies are helping their German customers to tap into new markets, and in this context have proved themselves to be dependable providers of investment- and sales-financing support. Some foreign leasing investments take the form of so-called cross-border operations, in which leasing companies lease direct to their customers abroad. The other approach is for leasing companies to set up domestic operations outside Germany with the aid of local partners or their own specially created foreign subsidiaries.

Question: Can you explain US cross-border leases?

Dr. Conen: Well, they are quite different from the hundreds of thousands of conventional leasing agreements signed every year by companies and private individuals wishing to invest in equipment or real estate. In this context, the term “lease” – often mistakenly referred to by the press as “cross border leasing” – is misleading. US cross-border leases do not constitute an investment as such, and have nothing in common with the cross-border activities that leasing companies engage in. They are a fiscal construct that in the past has allowed various bodies, including some local councils in Germany, to profit from US tax concessions. However, US tax legislation has changed, so transactions of this type are simply not feasible at the present time.