 |
| There are many types of leasing but, fundamentally, all fit one
of two categories: |
- Direct Lease. You identify the asset (and negotiate the
price) and arrange for the leasing company to buy it from the
manufacturer (if new) or the previous owner (if used) to rent
it to you.
- Sale-and-leaseback (also called purchase leaseback).
You sell an asset you already own to the leasing company for fair
market value or book written down value (whichever is less) and
then lease it back.
|
| In both cases, the lessor owns the asset, not you, and rents
it to you. As with any other rental agreement, you return the asset
at the end of the lease to the lessor. Some leases grant you an
end-of-lease option to renew the lease at a minimal cost (secondary
period) or to sell the asset to a third party as agent of the lessor.
|
| Often equipment manufacturers themselves act as lessors or have
an affiliated leasing company. This allows them to more easily help
their customers finance transactions. The other two groups of lessors
are banks and independent leasing companies. |
| |
| Types of Asset Finance |
| We can generally distinguish three major types of leasing: finance
leasing, operating leasing and contract hire. Although strictly speaking
not a type of leasing, we also include hire purchase in the following
discussion: |
- Finance Leasing (Full Payout Lease). You effectively
acquire all financial benefits and risks without actually acquiring
legal title. The leasing rate is computed to collect the full
value of the asset (plus finance charges) during the contract
period. At the end of the lease, the asset is sold to a third
party and you can receive a share of the sale proceeds (if the
lease is not being extended). Generally, you will not be able
to become the owner of the asset at any time - unless a private
arrangement is made with the third party. However, you usually
have the option to extend your lease and as you will have paid
for almost the full value during your initial lease period, the
rental payments for subsequent periods will be minimal (sometimes
referred to as "peppercorn rental").
- Operating Lease. Often with a shorter time frame than
financial leasing (always significantly shorter than the working
life of the asset), operating leasing is more like a regular rental.
The lessor expects to be able to either sell the asset in the
second-hand market or to lease it again and will therefore not
need to recover the total asset value through lease payments.
There may be an option to extend the leasing period at the end
(this negotiation can only take place at the end of the initial
rental period). As with finance leases, you will not be able to
become owner of the asset at any time but, contrary to financial
leases, you will not share in the sale proceeds.
- Contract Hire. A form of operating lease (often used
with cars and other vehicles) that includes a number of additional
services such as maintenance, management or replacement if asset
is in repair.
- Hire Purchase. This is an agreement for the hiring of
an asset with an option to purchase. The legal title will pass
to you when all payments have been made. The term of a hire purchase
must be significantly shorter than the working life of the asset.
You are able to claim capital allowances as if you had purchased
the asset outright, gaining immediate use of it. Hire Purchase
agreements are typically written for domestic users, not so much
for business users.
|
| |
| End of Lease Options |
|
At the end of the lease term, you have various options.
Lease contracts can stipulate that you:
|
- return the asset;
- have the right to act as an agent to sell the asset to
an independent third party; and/or
- can renew the contract or enter into secondary periods.
|
It is important for you to anticipate your future needs as each
option has its advantages and disadvantages and will affect your monthly
payments.
Seek the assistance of a professional advisor if you feel you need
help! |
