Leasing
Leasing means long-term lease of production equipment. In a leasing agreement for financing purposes, a financing company, the lessor, purchases the equipment from the seller, and leases it to the user, the lessee. On the other hand, when the seller grants a lease directly to the user, the arrangement is referred to as operating leasing.
All forms of production equipment may be the leased for financing purposes, such as machinery, vehicles, office and IT equipment, cranes, industrial halls, fixtures and real estate.
The cost of financial leasing comprises the rent, which is usually paid in advance on a monthly or quarterly basis. The rent is usually a certain percentage of the purchase price of the leased assets. The rent for assets subject to value added tax thus also includes value added tax.
Leasing arrangements have a financial advantage in that the lessee is able to make investments without providing additional security. Furthermore, leasing agreements are, as a general rule, not classified as liabilities in a company’s balance sheet, which enables a more advantageous debt-to-capital ratio when compared to investments using credit. The disadvantage, on the other hand, is the high cost of financial leasing, compared to other forms of debt finance. Hence, inconsiderate use of financial leasing and poor financial planning may result in unmanageable indebtedness.
The difference between leasing and hire purchase is that the company that in leasing, the lessee that has gained the right to use the equipment on the basis of the lease does not ultimately acquire ownership of the equipment, and instead the ownership remains with the lessor. In hire-purchase agreements, the purchase price is paid in several installments following transfer of the equipment to the purchaser, and the purchaser, ultimately, becomes the owner of the equipment.
For further discussion regarding the content of leasing agreements, see [Leasing Agreements].