Asset leasing provides companies with a unique alternative to acquiring the necessary operating equipment for their business. Asset leasing is carried out by operating lease or capital lease. Each option has its own impact on the company's balance sheet, but both provide an additional option for the business to finance the expansion of the business, streamlining processes and generating the assets needed. Often, lease agreement financing is easier and faster than traditional loan financing through banks.
Operating leases are asset use agreements that do not allow commercial entities to own ownership. Operating leases are most like car or apartment leases, and lease payments are made within a fixed period of time described in the agreement. The company does not list equipment as an asset on its balance sheet, just as tenants cannot list their apartment as their property.
The advantage of operating a lease is that it allows the company to save on maintenance costs, acquire new equipment after the expiration of the period, and use the assets for projects they are often unable to do. For example, a real estate company can use a business lease for a copier within a two-year period. At the end of the term, companies don't have to worry about remarketing and selling used copiers, they can simply trade new machines. This also avoids the need to increase maintenance costs as the equipment ages, as sometimes maintenance/warranty costs can be included in the lease payment.
Using an operating lease can help small companies or new companies get what they need in order to take on larger projects and hope to increase revenue. Construction companies can choose to do so to win bids for large jobs, rather than spending tens of thousands of dollars on heavy equipment that may be used only for that particular project. Companies can use short-term leases [sometimes a year] to get the equipment they need to do their jobs, and pay only a portion of the cost of the machine.
Capital leases are sometimes referred to as financial leases because they give companies the same ownership as traditional bank loan financing. The equipment obtained through leasing is recorded as company assets, and the lease balance is reported as a liability. One of the main benefits of capital leasing is that they are easier to obtain than traditional loans and there are multiple payment methods. This allows small or start-ups [almost no credit] to get financing that may not be available through traditional methods and the flexibility of return options. Capital leases are different from operating leases except that they are recorded on the balance sheet because they usually have longer lease periods.
Capital leasing allows companies with weak credit or no credit to establish their commercial credit while acquiring the assets needed to expand their business and increase their income. At the end of the lease period, the business will have ownership of the tangible assets that can continue to be used or sold by the business to obtain cash.
These leases may include special financing options to further assist the business in obtaining the assets needed to generate revenue while maintaining low overall costs and expenses. Financing plans, such as deferring 90 days or 90 days with cash, will allow companies to choose to use the equipment and generate revenue three months before the start of the lease payment; or choose to purchase the equipment directly and avoid financing costs when the funds are in place.
Another financing option is to use a residual value or balloon payment at the end of the lease period to enable the entity to own the asset. The remaining options allow for a lower monthly payment for the lease period, making the assets cheaper, thereby delaying the full cost of the payment/interest expense to a later time.
It is not entirely uncommon to have an almost customizable payment option on a capital lease. These options are used in specific industries that may experience significant revenue fluctuations within a year, such as seasonal business. These options may allow for a reduction or even no payment during one season of downtime and continue the periodic amount from a specific time of the year.
Orignal From: Asset financing: loan leasing
No comments:
Post a Comment