Leasing

The fundamental characteristic of a lease is that ownership never passes to the business customer. Leasing is a highly flexible way of acquiring the assets your business needs. It allows you to preserve working capital by financing equipment over the course of its cash-generating life.

The leasing company claims the capital allowances and passes the benefit on to the business customer, by way of reduced rental charges. The business customer can generally deduct the full cost of lease rentals from taxable income, as a trading expense. Leasing can involve lower deposits and lower monthly payments than loans or hire purchase. It also gives you a new line of credit, totally separate from everyday business banking and overdraft facilities.

For certain assets, including technology, you can benefit from a full life cycle management service, including sourcing, maintenance and disposal.

How does it work?
Like loans or HP, you make regular payments over an agreed term. The monthly rentals and lease period can be tailored to suit the needs of your business.

With leasing, you do not own the assets - they remain the property of the leasing company. However, you will enjoy most of the benefits of ownership - including the right to sell the equipment at the end of the lease and retain the majority of the proceeds.

The benefits of leasing to businesses are that your working capital is preserved. Payments you make are spread over the life of the asset. It allows equipment and plant to be updated as old assets need replacing.The Fixed monthly costs are benficial giving you greater control of your cash flow. Rentals can be offset against your taxable profits. Flexible end of lease options such as purchase or renewal.

There are different types of leasing arrangements decide which is best for you.

The finance lease or 'full payout lease'
This is closest to the hire purchase alternative. The leasing company recovers the full cost of the equipment, plus charges, over the period of the lease. Although you do not own the equipment, you have most of the 'risks and rewards' associated with ownership. You are responsible for maintaining and insuring the asset and must show the leased asset on your balance sheet as a capital item.

When the lease period ends, the leasing company will usually agree to a secondary lease period at significantly reduced payments. Alternatively, if you wish to stop using the equipment, it may be sold second-hand to an unrelated third party. You arrange the sale on behalf of the leasing company and obtain the bulk of the sale proceeds.

Operating Leasing
If you need a piece of equipment for a shorter time, then operating leasing may be the answer. The leasing company will lease the equipment, expecting to sell it secondhand at the end of the lease, or to lease it again to someone else. It will, therefore, not need to recover the full cost of the equipment through the lease rentals. This type of leasing is common for equipment where there is a well-established secondhand market, such as cars and construction equipment. The lease period in this case will usually be for two to three years, although it may be much longer, but is always less than the working life of the machine. You would not enter an operating leased asset on its balance sheet as a capital item.

Contract Hire
Contract hire is a form of operating lease and it is often used for your vehicles. The leasing company undertakes some responsibility for the management and maintenance of the vehicles. Services to you can include regular maintenance and repair costs, replacement of tyres and batteries, providing replacement vehicles, roadside assistance and recovery services and payment of the vehicle licences.