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Leasing Benefits

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There are a number of reasons why leasing, as a form of finance for the acquisition or use of tangible fixed assets, has evolved so early in history and is so popular today. These reasons are the benefits of leasing and its advantages over alternative forms of using or acquiring of assets. Let us call the latter of the “pros of leasing”.

We should not turn a blind eye, however. Leasing carries with it also some “cons”.

Leasing is a financial service and, as such, its primary consumer is the lessee. This is also the entity which will experience the pros and cons of the lease. Each plus or minus has a different weight for different lessees. It is wise for each lessee to carefully weigh the benefits and the negative sides of the lease before signing a lease. With this article, we will try to help this process.

Of course, the pros and cons of leasing are measured against alternative forms of financing – own funds or bank credit, and in the case of the operating lease, the pros and cons are transferred to the fundamental issue of the advantages and disadvantages of ownership compared to renting.

pros and cons of leasing

Pros of leasing

  • The most important “benefit” of leasing and the leading cause of its use by the lessees is the provision of the missing funds for the acquisition of a required asset.

Benefits of leasing EN

  • Preservation of “bank credit for other needs” can also be added to the top benefit. Most people and companies resort to different forms of credit. When using a lease to acquire a required asset, the ability to obtain and use bank credit for other needs – such as working capital for the firm – is retained.
  • The opportunity to plan the costs for using the required asset. Both the costs themselves and the accompanying VAT can be planned. In the case of full-service operating leases, even the maintenance and consumable costs for the asset can be planned.
  • Reduction or elimination of the risk of moral or material aging of the asset. This benefit is valid for the open-end financial leasing and above all for an operating lease.
  • There are many variables used for modeling the lease deal – initial installment, lease term, residual value, and so on. Different combinations of variables allow for the calibration of the leasing service exactly according to the capabilities and wishes of each individual lessee. This benefit is particularly applicable to the operating lease, where the term of the contract may be only a few months. For example, the employer may lease a car for a new employee for a short-term / eg. the probation period of the employee/ without worrying about the use of the vehicle should the employee leave.
  • Balanced payment for asset use. When choosing a car for leasing, the key question is “what monthly costs can I afford?”. Leasing allows a balance to be struck between capabilities and financing needs.

benefits of leasing - reduction of staff

  • Reducing personnel (for companies) or maintenance tasks for the leased asset (for individuals). In all types of leasing, the leasing companies take over part of the administration related to the leasing facilities – insurance, annual taxes, etc. In full-service operating leases, this benefit reaches its maximum.
  • Use or acquisition of high-quality assets. This is one of the benefits of leasing compared to The lessee can use or acquire an asset which might otherwise be too expensive or unaffordable.
  • Better use of capital. This is mainly a benefit for companies. When they use leases to acquire or use the necessary assets, they retain their capital for investing in other more profitable activities.
  • Tax benefits. In Bulgaria (in other countries leasing also benefits individuals) this advantage can be used only by companies. The advantages may be related to both the reduction of some tax liabilities and the rescheduling of the payment of other taxes (eg VAT on a closed end lease). The rescheduling itself can help companies improve VAT planning and VAT clearance from purchases against VAT on sales.
  • Debt, which is not shown in the Company’s Balance Sheet. A company’s analysis often includes different indicators that address the company’s indebtedness – for example, “Debt to equity” or “Debt to earnings”. Sometimes keeping a lower liability is important for companies, and operating leases can do just that, while also ensuring the use of the necessary asset.
  • Low capital costs. This is especially important for young companies who can not afford large capital spending at the start of their business but can pay the initial installment for the use of the required
  • Lower prices of the asset, insurance, and maintenance. leasing companies buy a variety of assets for their customers in large quantities. They insure every leasing asset and often (especially in operating leasing) provide maintenance to huge auto-parks. This makes it possible for certain price discounts for them from suppliers. They will not be possible for individual sales to individual customers. These price concessions, are often transferred by the lessors to the lessees, which makes the lease more efficient.
  • Reduction of inflation losses. Different periods come with different inflation, but whatever its size, inflation represents a depreciation of savings at the inflation rate. Europe considers the normal inflation of 3% per year. This means that the purchasing power of money saved each year decreases by 3%. Leasing prevents this loss by making inflation useful to the lessee.
  • The asset pays for itself. This benefit is only possible with production leasing assets. With good planning and a developed business, it is entirely possible that the leased asset will actually cover the full cost of leasing.

Cons of leasing

  • The main disadvantage or “minuses” of leasing is that it is a type of financial service which increases the amount of indebtedness. This implies certain financial obligations for the term of the lease, regardless of the future financial condition of the lessee.
  • Leasing entails some additional costs, which in some cases can be avoided if we avoid the leasing service. It is quite obvious that such extra cost is the lease interest. Another such is the insurance of the property (CASCO for cars), in so far as not all own assets are normally insured, it may be avoided in a direct purchase. There are also some extra costs which only accompany the leasing These include property registration costs, notary fees, registration costs in the CPER and similar. While the latter are not very expensive, they would have been totally avoided (or at least their duplication would have been avoided) with a direct purchase and avoiding leasing.
  • Lack of security. The financial requirements in the years ahead that the lease places on the lessee are inconsistent with its future financial position. Of course, we all expect tomorrow to be better than today, but this is not always the case, unfortunately. This was also one of the biggest problems in the 2008 crisis that put many businesses and people in a difficult financial situation.

Leasing benefits for vendors

The leasing service is targeted at the lessee. The main benefits and advantages of the lease are used by the lessee. At the same time, the lessee is not the only one who benefits from the leasing service. Another such party is the vendor of the leasing equipment.

The most common place to obtain a leasing offer is the place of sale of various assets. The reason for this is the huge advantage that leases give to the vendors of the leasing assets. The leasing service manages to increase their sales. This is especially true for the most popular leasing assets – cars, where leasing purchases often reach up to 50% of total sales. Every car dealership has established business relationships with at least one leasing company whose services are offered to potential buyers. The leasing service, in all its modifications, provides the benefits to the lessee, as described above, which increases the chance of selling the asset. Thus leasing is becoming a means of sales.

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