Decision for lease financing

Решение за лизингово финансиране

Leasing Practice

Step 3 – Decision for lease financing

This step is also made by the leassee. The remaining participants in the leasing transaction can only facilitate or hinder the informed decision by the lessee.

It is obvious that in order to continue along the steps of the leasing practice, the leassee must make an affirmative decision. Let us explore the most common reasons for using the leasing service. These include:

  • „Credit reason“ – this reason for using the service comes from the lack of the necessary funds for purchase of the asset. The leasing service provides the necessary financial means to achiev this. This is also the most popular reason for using leasing in Bulgaria.
  • „Tax reason“ – optimization of the volume of taxes paid and the dates on which this is done. This is a driving force only for corporate leassees with good tax planning. With the right approach it is possible to reach a tax effect from the leasing deal up to 50% from the purchase price /this of course varies in accordance with tax regimes in various countries for various assets/. In Bulgaria this is the main reason for using “operational leasing’. The tax practice in Bulgaria /as opposed to developed markets/ has made it almost impossible for physical persons – leaseess to use whatever tax reduction.
  • „Optimisation of service“ /possible only for leased cars/ – this is again mostly used by corporate leassees, who chose full service operational leasing or at least include some of the car service into the leasing deal. The added value for the lessee and the reason for using this form of leasing is that the lessor organizes and catters for the on-going service of the car. Hence the lessee does not need in-house employees to take care of the auto park. The full service in some developed markets also includes fuel management. In Bulgaria including the fuel to the leasing service is still not offered.
  • „Decreasing risk“ – leasing can transfer various kinds of risk to the lessor. This gives a potent motivation to some risk-sensitive lessees for using the leasing service. Such risks may be the inflation risk /in 2017 in Bulgaria the interest rates on some leasing contracts fall behind the inflation rate/, the risk of total asset loss /even if fully covered by insurance, such a risk always exists/, market risk /this is applicable in the existance of a residual value in the leasing contract/, etc. Some of the mitigated risk are solely a function of the size of the leasing company. For example if it is possible for a vendor to refuse cover of a disputed guaranty issue to a client with one car, his refusal to honor the guaranty to a large leasing company is highly unlikely. The risk reduction is useful both to corporate lessees as well as individual clients.
  • “Property considerations” – the different types of leasing have different treatment of the ownership of the leasing asset – accounting, tax and practical. This provides an excellent tool for companies that are sensitive to ownership and use the leasing service as a tool to optimize corporate ownership.
  • “Accounting considerations” – the ownership treatment and its respective booking in the corporate ledger have direct implication on the calculation of various performance indicators of the company. Hence some use leasing as a tool to optimize some KPIs.

In conclusion of this article on the “Lease decision” we will mention the location where the offers were received and the decision to use the leasing service taken by the lessee. Most often, this is not the office of the Chief Financial Officer, the Office of Market Research Employees, the Chief Accountant’s Room, or even the living-room of the lessee. Most often, the place of receipt of all the documents related to the leasing transaction and the decision to use leasing as a service is the place of sale of the leasing asset, etc. point of sale / POS /. This is where many lessors focus their advertising and marketing efforts. Bulgaria is no exception. Let’s hope that all efforts are aimed at helping the future lessee make an informed decision for using the service.