Leasing
Leasing is a common contractual mechanism used to hold assets and make them available on an agreed basis. In a typical arrangement, the lessor (owner) leases the asset to the lessee (user) in exchange for a series of periodic payments—for example, the rental of a machine. The user adjusts the rental to its own needs, usually paying fees during the operational life of the asset, while the owner holds title to the asset during this period. The lessee can obtain usage rights without having to make a large up-front payment. At the end of the lease period, the asset can either be returned to the lessor or purchased by the lessee for a nominal fee.
The concept of leasing dates back to ancient times. Merchants would rent their boats and carts for short periods for customers to use, a practice known as bailment. Over the centuries, periodic innovation in the structure and contractual implementation of bailment-type transactions evolved, with the latest significant changes occurring during the 20th century.
The emergence of leasing as a mainstream business activity only occurred when computing and mechanical machines could be leased economically. The annual rental payments on these assets often reflected the cost/economic benefit of each machine over its useful life. This trend was initially driven by tax factors in the USA and very soon became a global phenomenon.
The primary benefit of leasing is that it enables users to access assets that can improve their business operations without having to make large upfront capital payments. This structure makes it easier for companies to budget their finance requirements and to target returns in the medium term. At the same time, leasing provides access to more money than would usually be possible since the user can usually take out a longer lease than if they used loan finance. Similarly, it is often easier to obtain leasing than loan finance as it is secured against the asset itself rather than against the borrower.
From the investor/lessor’s perspective, leasing can provide robust returns over relatively short periods and a relatively low accounting cost for their capital. These returns can be increased when the investor takes on the additional role of asset manager, providing equipment maintenance and support services to the lessee.
Leasing has certainly become an important mechanism for modern businesses to access the capital and resources that they need to grow and compete in their market.
The conventional forms of leasing operate in competitive markets and the terms of the leases reflect a competitive rate of return and a spread relating to risk. However, some lessees may require specialized or tailored arrangements and therefore lessors can either provide more specialized forms of leasing with the associated higher returns or they can offer a range of services in an all-in-one package.
Furthermore, in the current climate of increased regulation, increased costs and increased competition, it is expected that leasing will become an increasingly important financial arrangement, allowing businesses to acquire the assets they need in an efficient and cost-effective manner. As a result, the use of leasing is expected to grow over the next few years.
