Broadly speaking, financial leasing is a contract between lessor and lessee in which the lessee has the right to use and benefit from a good or asset, in exchange for a fixed rent for a specified period.
A distinctive benefit of financial leasing is that in this type of lease, the lessee has the option to purchase the asset in question at the end of the lease term, in addition to the traditional options of renewing the contract or returning the asset.
It is the person (natural or legal) who is the legal owner of the asset to be leased, this person is the one who transfers this asset to the lessee and receives the rent.
It is that person (also natural or legal) who receives the asset. This person agrees to pay rent in exchange for the use of the asset.
The financial lease contract can have many names:
Leasing to dry, financial or operational leasing, leasing for renting, rent with the right to purchase, or simply leasing.
Advantages of financial leasing
- If the tenant’s credit history is good, up to 100% of the investment can be financed.
- Usually, the financial lease is not considered a debt, so multiple leases can be had without affecting the lessee’s indebtedness capacity.
- In rapidly obsolescent technology assets, it is easy to stay ahead of the curve, as you can renew the asset as quickly as contracts are renewed without having to worry about selling the old asset or having little use for it.
- The amortization fee is considered a tax expense, this means significant savings when paying taxes.
- There is a purchase option at the end of the contract.
Choosing a financial lease of an asset versus buying the same asset can often mean not having to go to the dissolution of the company by having to sell participation in the company.
Is financial leasing right for me?
As we already mentioned, financial leasing has many advantages and, in general, the good use of leasing, as well as debt, can mean better cash flow and even saving money at the end of the year and an increase in profits. .
To know if leasing an asset is right for you, you have to analyze several factors:
Your cash flow:
A large investment entails a big blow to cash flow and, although many times we go by the way of numbers, considering long-term profits, many other times a positive cash flow and that gives us room to experiment and grow is more important than a little more usefulness.
Profits are not everything, negative cash flow can be a big headache, or even cause bankruptcy. Don’t forget to evaluate the investment with your cash flow projections.
The obsolescence of the asset:
When we talk about technology, which encompasses a large part of the assets that companies require, it can be a challenge to speculate on its real obsolescence. It’s easy to speculate from the start how long that asset might last, but not how long it will be able to compete against new technologies, or when a new version will come out that’s worth more to us than the one we bought in the first place.
The obsolescence of the technological asset is usually tainted by planned obsolescence and requires a very precise analysis by an expert.
The tax burden:
As we mentioned, one of the great advantages of financial leasing is the possibility of deducting interest from the rent, which can translate into enormous savings at the end of the year simply in deducted taxes, which must be taken into account when weighing the decision. to buy or lease.
It is well known that for a company to remain fresh and at the forefront it is necessary to continuously experiment, either within the same line of business, or also open up to new horizons by covering new markets.
If you plan to make a large investment in an asset, for example in a machine to pack your star drink in plastic bottles, you must be sure, not only that this investment will have a return, but that this investment goes in the same direction as your company. within that return period.
If, for example, you discover in your experiments that your customers like aluminum containers more, in that case the plastic packaging machine was an investment that, although it will have its projected return, was not an efficient investment.
Remember that before making any decision, an analysis is necessary with the necessary care and precision that only an expert can give a professional and detailed analysis. If you need advice on your business we can help you. Tell us your situation.