Leasing / Asset Finance Guide
Overview
Paying for an asset with cash can be a significant drain on your working capital. However, leasing the asset gives you access to the asset without having to pay for it outright. Leasing is basically a rental agreement giving you (the lessee) the right to use an asset owned by the lessor (finance company) for a fixed period of time in return for regular payments (rental payments). You can lease just about anything, from equipment valued at a couple of thousand pounds to assets worth millions. Leasing contracts are flexible and can be tailored to your needs.
You need to consider the effects of leasing on accounting, reporting, tax, and your cash flow. This section will give you a general overview, though it does not replace professional advice. It may be an idea to consult your accounting and tax advisors before finalising a lease transaction to reap the maximum benefit and avoid any complications.
How Leasing Works
Although there are several types of leasing, they generally 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 supplier/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 is the owner of the asset, not you, and rents it back to you. As with any other rental agreement, at the end of the lease you return the asset to the lessor. Some leases grant you an end-of-lease option to renew the lease at a small cost (secondary period) or to sell the asset to a third party as agent of the lessor.
Often the actual equipment manufacturers themselves act as lessors or have an affiliated leasing company. This allows them to help their customers finance transactions with minimum effort. The other two groups of lessors are banks and independent leasing companies.
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