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MGT604 - Management of Financial Institutions - Lecture Handout 33

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Leasing Companies

  1. A lease or tenancy is a contract that transfers the right to possess specific property. In law, there are two types of property: historically, land is the more important because, under normal circumstances, it holds the highest value in economically developed societies. Ownership of land is an aspect of the system of real property or realty in common law systems.
  2. When structured as an operating lease, this is a form of financing that avoids the down payment usually required for the purchase of equipment. Because leased equipment is not owned by the company, it does not appear on the balance sheet. A financing lease does appear on the balance sheet.
  3. Don't be intimidated! For most people, leasing is an unfamiliar concept and therefore a little scary, but leasing isn't any more difficult than purchasing a car. Fully understanding how the leasing process works is the first step toward a positive leasing experience.

Leasing a vehicle is similar to renting a car, just for a longer time period. Like renting a car, a person who leases pays a pre-determined rate to drive a vehicle for a pre-determined amount of time. You never own the vehicle and return it when your lease is up. A person who leases enjoys the benefits of driving a car without assuming the up-front costs, and many of the risks of ownership.

Basic Purpose of Leasing

Bargain Purchase Option

A lease provision allowing the lessee, at its option, to purchase the equipment for a price predetermined at lease inception that is substantially lower than the expected fair market value at the date the option can be exercised.

Broker

A company or person who arranges, for a fee, transactions between lessees and lesser of an asset.

Certificate of Acceptance

A document whereby the lessee acknowledges that the equipment to be leased has been delivered, is acceptable, and has been manufactured or constructed according to specifications.

Economic Life

The period of time during which an asset will have economic value and be usable.

Effective Lease Rate

The effective rate (to the lessee) of cash flows resulting from a lease

Technological Benefits

Technology provides a needed and powerful edge in business; the following points examine those benefits and let you decide how these benefits provide you with the needed edge in business. An equipment leasing arrangement provides you the edge you need without running the expensive costs associated with purchasing state-of-the-art equipment.

Wider Options, Lesser Costs

With equipment leasing arrangement you are free to select your choice of equipment without paying the full price. This advantage also comes with the fact that most business equipment leasing companies will often handle everything from the maintenance to the deployment of their equipment. Your company can save the costs associated with the equipment as the leasing company usually gets price cuts on equipment and related services since they buy in bulk.

Leasing Companies

Leasing has become increasingly important over the last few years. Uncertainty about future tax legislation and strong pressure on costs in bulk business are the controlling factors in the industry. A high level of product and market homogeneity for classical products, at the same time as low customer loyalty, is forcing companies to adopt positive distinguishing signs in the market.

Leasing Act

Leasing acts as a "hedge against inflation." Lease payments are fixed for the full term of the lease and, therefore, not subject to inflationary increases. New equipment obtained today is paid for with tomorrow's Rupees. A fixed lease payment enables you to effectively budget and manage the acquisition of capital equipment. At the end of the lease, you may choose to exercise the agreed upon purchase option or simply return the equipment. Leasing offers you the most manageable and economical way of keeping up with evolving technologies. A lease payment may include installation charges or other related out-of-pocket expenses. Down payments are seldom required. Leasing helps establish additional credit resources for your business. Current working capital is not used, which allows your business to use the
cash for other investments or possible expansion. A lease is a simple and economical way to obtain the benefits of the latest technology without assuming the up-front costs, and risks, of ownership.

Simply defined, a lease is a usage agreement between an equipment owner and a user of that equipment. The lessee pays a periodic fee, usually monthly, to the lesser for the use of the equipment. Leases most often take the form of written contracts with specific terms and conditions spelled out: length of term, amount and timing of payments, and any end-of-lease conditions or restrictions. The lesser is usually viewed as the owner of the equipment during the lease term, but depending on the type of lease you select either you or the lesser may be able to claim the benefits of ownership for tax purposes. Regardless of which type of lease you choose, the future expected value of the equipment (the residual value) is considered when pricing most types of leases. The residual value is the lesson’s estimate today of the equipment's value when the lease term ends. Or in other words we can say that it is like purchasing a car, a car lease typically lasts for 24, 36, or 48 months; the longer the lease the lower the monthly payment. However, it's usually smarter to get a shorter lease. Your best bet is to get a lease for the same amount of time the car is under warranty. Doing so insures you are covered for most car problems for the entire time you are leasing the vehicle.Statistics show most cars begin experiencing problems after being driven for 4 years; therefore a lease term longer than 48 months should be carefully considered. Cars begin to lose value immediately after purchase and continue to lose value until they are scrapped. They become less desirable as they accumulate wear and tear or are replaced by newer models. This process is called depreciation. The cost of your lease depends on the expected depreciation of the vehicle you are leasing. All cars have an expected depreciation. In other words, before a car is leased for the first time, a dealer knows the vehicle's value, given normal wear and tear, for each year after it leaves the lot. When leasing, the difference between a car's original value and its value when the lease term is over, determines how much will be paid during the lease. When leasing a car, you should have a clear understanding of the vehicle's depreciation schedule. Some cars lose value faster than others. For example, some local brands are usually bringing better lease rates than many foreign brands because they are known to have low depreciation. Before leasing make sure you understand both the car's original value and its projected value at lease end, called the residual value.

Leasing in Europe and United States of America

The global technology equipment leasing market is worth an estimated US$25 billion a year and continues to grow rapidly. Currently, the Europe claims the lion’s share of the market. The concept is more deeply ingrained in the American culture where renting cars, houses and even furniture is the norm. And, because it is so much part of the mainstream, US businesses have historically been more receptive to the leasing message than their European counterparts. The US is also more homogenous than Europe, in terms of both business culture and financial and regulatory frameworks. However, largely because the business arguments in favor of equipment leasing are so compelling, the market is now beginning to take off in Europe. This article looks at the benefits of leasing and the reasons why IT directors and facilities managers across Europe are increasingly adopting this method of financing the acquisition of new equipment. With US-based equipment leasing companies establishing a stronger presence in the region, more European businesses are being educated on the advantages of this approach to asset finance. One of the most important benefits is that leasing helps companies conserve cash.

Paying cash for equipment, or even making large down payments, can deplete reserves and ultimately even lead to the business failing, if insufficient reserves are available to pay off creditors on demand.

In contrast, leasing enables customers to retain their cash, by eliminating the need for down payments. Many leasing packages provide 100 per cent financing and even cover "soft" costs like shipping, installation and training. In addition, there are no application fees. Instead, businesses are able to make affordable, flexible monthly payments. Today, leasing
options exist that let users design a financing plan around the needs of their business, whether their priority is guaranteed ownership; the flexibility to return equipment; specified purchase options or varying monthly payments to match seasonal cash flow. Customers can even convert a recent purchase to a lease. To make certain their move into technology equipment leasing is a success, businesses must also work with providers capable of developing financial products tailored to their precise needs no matter the region in which they are operating. Drawing on expertise gleaned from its long-term presence in 15 European countries, Key Equipment Finance is well positioned to do just this.