- There are numerous financial and business reasons for a prospective lessee to lease rather than to buy.
- Leasing is also particularly attractive to equipment users who cannot take timely advantage of the depreciation deductions.
- Any equipment user is a prospective lessee.
Many firms fail to consider equipment leasing because they lack an understanding of the advantages. Even those who do consider it frequently do not know how to maximise it.
On the other hand, many lessors overlook obvious opportunities for profit because of a limited view of equipment financing.
Both parties need the legal, financial, tax, accounting, and business backgrounds and tools essential to evaluate, negotiate, advise on, and document successful equipment lease transactions.
Today the equipment leasing industry plays a major role in the financial community.
A user can lease virtually any type of equipment on a variety of terms.
There are numerous financial and business reasons for a prospective lessee to lease rather than to buy. Leasing is also particularly attractive to equipment users who cannot take timely advantage of the depreciation deductions.
Any equipment user is a prospective lessee. The users can range from multinational corporations, to sole proprietorships.
Any firm in the financing business can be a potential lessor of equipment.
Because of the competitive nature of equipment leasing and the expertise required, however, only certain types of organisations are active in the leasing market.
Independent leasing companies provide a major source of equipment lease financing.
Because leasing is their principal source of revenue, independent leasing companies must be extremely aggressive.
Finance leasing companies—lessors of millions of shillings of equipment each year— operate in much the same manner as banks or other financing companies.
They do not maintain an equipment inventory, but, after agreeing on a lease with a lessee, they buy the specific equipment needed for the lease. The lessee orders and receives the equipment from the vendor.
When it arrives, the finance leasing company pays for it, takes title, and leases it to the equipment user.
Finance leasing companies typically write leases, called finance leases, that run from 70 to 80 percent of the equipment’s useful life.
The total amounts received under these leases, including the rents payable and the equipment residual value proceeds, are usually sufficient to provide lessors with a full return of their equipment investment and a profit.
If the equipment purchase is leveraged with third-party debt, then the rents will generally be enough to cover the full repayment of the debt.
Service leasing companies provide non-financial services to lessees in addition to the equipment financing. Services may include equipment maintenance and repair or advice on the equipment’s operation and design.
Service lessors typically limit their activity to a single type of equipment, such as computers, or to a single type of industry, such as the mining industry.
The intense experience gained through the specialisation enables them to reduce many leasing risks. For example, because lessors frequently handle used equipment, they know how to deal efficiently with equipment when it comes off lease, which in turn reduces their re-leasing or sale risk.
Because of that reduced risk, they can offer attractive lease termination or equipment exchange privileges.
Many banks are actively involved in equipment leasing.
They usually are lessors in net finance leases because of regulatory requirements and because those leases provide the least risk and most similarity to their lending activity.