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Leasing - common purchase practice for companies

17/07/2019 Consulting

Proven principle

The principle is surprisingly simple: in leasing, a good is acquired, but the purchase price is first paid by a leasing partner or - nowadays common practice - leasing companies. The buyer undertakes to pay instalments to the partner over an agreed period of time and finally has the opportunity to purchase the goods in question in full for a residual price. For private individuals and companies alike, leasing is attractive because it offers far greater flexibility and significant risk minimisation for necessary investments than traditional forms of financing such as direct purchases or loans. Particularly in recent years, the leasing industry has become increasingly important, especially in conjunction with industry 4.0.

The idea of "renting out" goods is anything but a current trend. Although the origins of financial leasing as we know it today may lie in the America of the early 20th century - companies such as IBM or even the Bell telephone company quickly recognized the advantages in the distribution of their equipment - already in Antiquity people resorted to instruments comparable in the broadest sense with today's leasing transactions. Historians can prove the existence of first societies in Babylonia already around 1800 before Christus. Soldiers who received farmland in return for their services leased the land to farmers for cultivation in exchange for payment. 

It is hard to deny that financial incentives and effective cost reduction are still good arguments for today's entrepreneurs to choose leasing models. But in the course of its evolution, leasing has developed into an instrument that not only convinces through its diversity, but also has the potential to meet the requirements of a rapidly changing global economy. More conventional forms retain their justification: In the future, too, companies will continue to cover their demand for state-of-the-art machines and vehicles with the help of leasing, while less financially strong airlines will finance their new aircrafts with and without staff through funds and companies. Airlines from the Middle and Far East in particular are currently among the most sought-after lessees, because after a few difficult years, demand is growing rapidly, especially there. Thanks to a competitive cost structure, a young, uniform and modern aircraft fleet and the ability to react flexibly to market developments at all times, airlines have been able to strengthen their position.

Today, however, it is no longer just the individual object that is leased. Whole production plants and chains can already be rented. As well as capital goods, from simple company cars to company buildings. Probably the most sustainable development in leasing, however, is a structural rethink. Because in a digital world that challenges companies through constant change, the focus has shifted away from simple "hardware". The focus is more and more on the financing of complex economic processes and process optimization and their constant development. This also includes the provision of the necessary IT infrastructure and the associated know-how as well as services and the maintenance of the technology.

Made-to-measure solutions

Hardly any company in the high-tech sector is able to dispense with cooperation with leasing companies. Not only the aerospace industry, but also the automotive industry, rail transport and mechanical engineering benefit from the freedoms offered by leasing. As diverse as the sectors are, as individual are the agreements made by the partners involved. Essentially, there are two basic types of leasing:

"Financial leases" focus on the financing function. During the basic lease term, the lessor's costs are covered by payment of the agreed installments. At the end of the leasing period, the lessor usually takes over the object, often for only a symbolic residual value, or returns it. A common variant of this agreement is leasing with partial amortisation. The total costs of the lessor are only covered proportionately and an extension of the contract is agreed at the end of the rental period or the contract is terminated with the purchase of the goods. The advantage in this case is above all a high degree of flexibility for the lessee, as he has the option of switching to a technically more modern product at any time and of postponing the investment expenditure for the acquisition to a more suitable point in time.

"Operating leases", on the other hand, are rental agreements that, unlike financial leases, offer very short-term termination options. The lease instalment is the consideration for the use of the leased object and usually also includes the costs for maintenance and service. The respective goods are usually taken back at the end of the contract by the lessor, who bears the investment risk himself. In practice, the boundaries between this model and partial amortisation are often blurred. This shows to which extent the leasing model can be adapted to the individual needs of companies.

Slight difference

In German-speaking countries, the term "leasing" is often equated with "rent". In principle, the description is correct, since even in classic tenancies the user of an object is not its owner. However, there are significant legal differences which the contractual partners must take account to. In contrast to a simple tenancy, a lessee has all the rights, risks and obligations usually borne by the lessor. This also includes liability for damage or loss of the relevant object.

The advantages of leasing over purchasing, on the other hand, are very clear. Although new regulations will come into force, companies will now have to include the obligations from leasing transactions in their balance sheets - some large companies will face challenges as a result of this - the core arguments of the financing model will be retained: Financial planning security and a protection of the own liquidity, with immediate use of the relevant goods. This enables companies to continuously fall back on the latest technologies and developments and to design flexible contracts according to their requirements. This ensures that those who act wisely remain competitive at all times. But the contractual commitment is not without risks. In practice, you are tied to the leased item during the term of the contract. In addition, the advantages of the model are sometimes bought through higher overall costs than with other financing models. Young companies in particular, who find it difficult to predict business developments, run the risk of being faced with considerable financial burdens as a result of leasing contracts.

Of course, even companies with many years of experience are not exempt from making the wrong decisions. As with all other forms of financing, every contract must be based on a well-considered concept. However, then companies can fall back on a versatile tool whose conditions can be adapted more precisely to their own business model than almost any other.

Sources: handelsblatt.com | compeon.de | kreditrechner.com | airliners.de | handelsblatt.com | deutsche-leasing.com | erfolg-und-business.de | sueddeutsche.de

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