As we have already stated earlier, the company should have some fixed assets in order to carry out its activities. There are several ways to obtain the fixed assets of the company, such as purchasing, contribution of shareholders, exchanges and other. A special possibility of assets obtaining through leasing and leasing options we will consider in the present article.
A leasing is a complex of relations on a lease of company fixed assets.
The difference between a leasing and a bank credit is that according to the leasing agreement the borrower (lessee) acquires not money funds but certain fixed assets in use. Lessee pays lease payments to lessor for using leasing.
There are two basic types of leasing: operating leasing and finance leasing.
An operating leasing is a leasing form on which much of the risks and ownership right of the leased property remains to the lessor. Upon expiration of leasing the lessee shall return the leased property to the lessor.
A financial leasing is a form of leasing in which right of ownership is transferred from the lessor to the lessee at the end of the lease agreement.
The size of lease payments depends on the form of leasing.
Lease payments at the size of credit interest rates are set at operating leasing most often.
Lease payments in the amount of credit interest rate and depreciation are set under financial leasing if the leasing agreement term is equal to the period of depreciation of the leased property.
If the depreciation term of the leased property is different from the term of the leasing agreement, the amount of lease payment is established by agreement between the parties in such amount to cover the cost of the property during the leasing period.
The financial manager should evaluate the alternative of using of leasing or bank credit.
The main benefits of leasing before bank credit are the follows:
- Business leasing can be easier to get by companies which don’t have a credit history or their financial indices don’t meet the bank standards for obtaining credit;
- Leasing agreement has mainly longer duration than the credit agreement;
- Additional collateral is not required for leasing;
- There are benefits on taxation when using leasing schemes in many countries.
Leasing payments have to be predicted in the plan of cash flow of company business plan.
In general we can say that leasing is a very attractive alternative to bank credit for the purchase of fixed assets of the company.