Leasing

Leasing means long-term lease of devices or production equipment. Lease financing is a tripartite arrangement involving the lessee of the financed asset, the seller of the asset and the financing company. There are different versions of lease financing, depending on whether the lease also includes services related to the use of the leased asset.  In financial leasing, a financing company, the lessor, purchases the equipment from the seller, and leases it to the user, the lessee.  In an operational leasing, the lessee agrees with the vendor of the leased asset on fixed-price services (e.g. maintenance) the vendor provides with reference to the leased asset. This fixed price is invoiced by the financing company within the lease invoices as part of the financial contribution and passed on to the vendor providing the services.

All forms of production equipment may be leased for financing purposes, such as machinery, vehicles, office and IT equipment, cranes, industrial halls, fixtures and real estate.

In lease financing, the item being financed is assigned a value as a percentage of the initial purchase price (the amount being financed) that the leased item has at the end of the lease term. This value is called the residual value and can be almost anything upwards of 0%, depending on the asset and the length of the lease term. The difference between the residual value and the purchase price is charged to the lessee by the finance company as rent, divided equally over the lease term. The rent consists of these payments of the purchase price and the financing margin of the finance company, as well as a service charge included in the rent in the case of operating leasing. Leases are usually invoiced in advance and at an interval agreed in the lease agreement, which may be monthly or quarterly, for example.   If the rental property is subject to value added tax (VAT), the rent also includes VAT.

Leasing arrangements have a financial advantage in that the lessee is able to make investments without providing additional security, as the leased asset serves as collateral for the financing of the lease. 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. Also, the leased asset is not the property of the lessee, so the asset is not recorded in the balance sheet as the property of the user of the asset. 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 some cases, lease agreements may include a condition that the lessee must find an outside buyer for the leased property at the end of the lease term, which the finance company will approve. For further discussion regarding the content of leasing agreements, see [Leasing Agreements]⁠.