The benefits of leasing

Whatever industry you are in, good financial management and a clear policy towards asset procurement is vital. Investment in labour saving machinery can be central to winning new contracts, maximising productivity and of course maintaining profits.  Yet tying up hard earned and sometimes scarce capital in depreciating assets is a risk.   

Leasing can help take the strain off your reserves and even take the cost of capital items off your balance sheet.  

The benefits of leasing

  • Capital management - keep the reserves in your business
  • Tax efficiency – lease rentals are a business expense that can be offset against taxable profits 
  • Flexible finance – leasing is available on most assets, from a small car to a giant production line
  • End of term flexibility – A number of options are available when the finance period ends.

A closer look at the benefits

Leasing allows you to bring the latest equipment into your business and achieve the efficiencies and competitive advantage you need.  You can make as little as one payment in advance followed by a series of fixed rentals over the agreed term. In this way, the asset can start to earn income immediately and effectively pay for itself.  At the end of the lease, you can either upgrade the equipment or keep it for an agreed monthly rental.

A QUESTION OF TAX

Lease rentals are a business expense that can be written off against your taxable profits. When you buy your equipment, you can only write down the depreciation and any loan interest, which means that leasing could lead to a lower tax bill at the end of the year.

SPREAD THE VAT

VAT is payable on the rentals, not the purchase price, giving an immediate cash flow benefit.  The VAT on the rentals is reclaimable although please note that special rules apply to cars.

LOWER PAYMENTS

Rentals are kept lower by building a residual value into the agreement.  The leasing company will forecast the resale value of the asset at the end of the term and reflect this in the rentals.  This is commonly known as an operating lease and is available on a wide range of assets.

FIXED BUDGETING

Lease rentals are fixed for the full term so you will know how much your equipment will cost you every month. Maintenance can be incorporated into the lease if a service contract is available from your supplier.

AN ADDITIONAL LINE OF CREDIT

A lease is separate from your other borrowing arrangements and leaves valuable banking lines available for other purposes.

OFF BALANCE SHEET FINANCE

Some leases can be treated as off-balance sheet as your company doesn't own the asset. This means that the asset and the associated liability won’t appear on your balance sheet and influence gearing calculations.  You should always seek your accountant's opinion before deciding that a lease can be treated as off-balance sheet.

 

Quick questions

Can I claim the capital allowances?

In most cases no, as the asset is owned by the leasing company.  There are exceptions for leases over 5 and in some cases 7 years.  You should talk to your accountant about the allowances you can claim.

Who is responsible for maintenance and insurance?

Normally you are although it is possible to build maintenance into some leasing contracts.

What is the difference between a finance lease and an operating lease?

A finance lease is very similar to a loan where the rentals are calculated to recover the full cost of the asset plus interest over the term.  With an operating lease, the leasing company will take a risk in the resale value of the asset and factor this into the rental calculations.

Can I ever own the asset?

No, but with a finance lease you can have effective ownership and receive the majority of the sale proceeds when the asset is sold at the end of the agreement.

Are there return conditions?

With an operating lease yes, as the rentals will be based on the equipment coming back in a certain condition.  There are not normally return conditions with a finance lease although you are required to keep the asset in a reasonable condition at all times.

Other sources of useful information

British Business Bank finance guide

HM Revenue & Customs business leasing manual

Why Productivity Finance

At Productivity Finance, we can guide you through leasing and a comprehensive range of other finance options to help you acquire the assets you need. Whether it involves new or used plant, machinery or equipment, we have a solution to suit businesses of all sizes. Contact us for more information.

04th August 18


The benefits of leasing


By: Paul Marston

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