Operational vs. Financial Leasing
Leasing is nothing more than a method of paying for the use of a vehicle, equipment, building or other asset over a specified period of time. It might sound like renting, but is not since they are very different. While the companies or natural persons can rent a car for as little as a day, or even a few hours, leasing typically starts at 24 months and doesn't provide for easy termination or vehicle swapping.
- If the lease life exceeds 75% of the life of the asset;
- If there is a transfer of ownership to the lessee at the end of the lease term;
- If there is an option to purchase the asset at a "bargain price" at the end of the lease term;
- If the present value of the lease payments, discounted at an appropriate discount rate, exceeds 90% of the fair market value of the asset.
- Manage cash flow — operating leasing avoids large out-of-pocket expenditures. Low monthly payments help the company better manage its cash flow to keep the business growing;
- Tax advantages — Payments are considered operating expenses and are fully tax-deductible;
- Refresh technology or brand new assets — at lease-end, the company has the option to "trade up" to new equipment / vehicle for keeping its business competitive;
- Flexible terms and structures;
- Flexible lease-end options — at the end of the lease term, the company has several options available depending on its business needs:
- Renew the lease at a lower rate,
- Return asset with no further obligation,
- In case of equipment, upgrade it to take advantage of new technologies.
Particularly in this sensitive economic time, this financing product is the choice for both parties; they are more cautious, no longer allow surprises in budget risk-taking and try to cut costs as much as possible.
In the automotive market, by choosing operating lease, the customer knows exactly how much the fleet costs, has full control over the costs and pays only for what he uses. The lessee benefits from a lower monthly installment, increased flexibility and the ability to restructure the product based on its business needs (estimated number of kilometers per year, usage period and car model).
- Obtain all the licenses that are needed now to supply all users; You have funds allocated in your budget for only some of the licenses you need. You can arrange a lease for all the licenses you need and still be within your annual budget requirements.
- Include consulting, hardware, customization, and training costs in the lease; Bundling the individual components of a project in one lease is normally simpler and tends to result in level expensing rather than having some components expensed upfront before benefits are realized;
- Include internal implementation costs in the lease where appropriate. You're doing some of the work, like data conversion. These costs also be included in the lease;
- Own the license at the end of the lease without additional payment. In fact, unless you clearly have only a short-term need for the software, you should only execute a finance lease where there are no additional payments at the end of the lease. We think the value of software at the end of the lease is in most cases close to, if not greater, than the value at the beginning. Thus, an operating lease with an option to purchase at fair market value option at the end of the lease will in almost all cases turn out to an expensive proposition;
- Correct the failure of many accounting systems to recognize the long-term benefits of software and related costs. A lease will in most cases permit you to better match software expenses with the period of benefit.
- Hardware, training, installation, and customization in the lease; Bundling the individual components of a project provides your customer with one-stop shopping and avoids expensing some items upfront before benefits are realized;
- Obtain a strategic competitive advantage over competitors which do not offer leasing alternatives to your customers;
- Neutralize the strategic competitive advantage of competitors which offer leasing alternatives to your customers;
- Offer leasing options to your affiliates. Leasing programs can be expanded beyond your direct sales force;
- Realize the potential for additional licenses for additional users, licenses for related products, and additional charges for installation, training and customization that customers require;
- A master lease agreement with one-page add-on leases allows you to offer users additional products with minimal financing effort by the user.