What Is Financial Leasing And How Does It Work?
A financial lease is a contract between natural or legal persons in which one agrees to facilitate the use of tangible goods in exchange for a monthly payment, for a mandatory term of at least one year, while the other party agrees to pay the amount of money specified in the contract.
To better understand what financial leasing is, it is necessary to know the following concepts:
Lessor: It is the one who grants the use of a property.
Lessee: Is the person who periodically pays the lessor for use, generally with the option to purchase.
Assets: The assets of a company are the rights and assets that it possesses, which can be converted into cash, for example, real estate, accounts receivable, furniture, etc.
Financial leasing is used mostly by SMEs that aim to grow, although it is also common among entrepreneurs who do not have the economic capacity to purchase goods for their businesses.
Main leased assets
- Computer equipment
- Office furniture
- Heavy or specialized machinery
- Medical equipment
Benefits of financial leasing
- Up to 100% of the investment can be financed.
- It is an opportunity to renew your company technologically.
- Amortization is recorded as depreciation and interest as financial expenses.
- The tenant’s capital is preserved for other projects.
- The lessee is the one who chooses the good and negotiates the price as well as the delivery conditions directly with the supplier of the good.
- Has flexible deadlines.
Finance lease example
A company is dedicated to the manufacture of toys, has decided to lease specialized equipment to a company. The useful life of the equipment is 7 years, the lease term is 6 years, the fair value of the equipment is $20 million, and the present value of the lease payments is $15 million.
As a characteristic we find that the equipment is specifically for the toy company, in addition, the lease agreement allows the company to extend the lease at lower rates or to buy the equipment at the end of the previously agreed term for $2 million.
The fair value of the equipment at the end of the lease is expected to be $5 million, so we find that this is effectively a finance lease, since the lease term is more than 70% of the useful life of the equipment and the Lease has the option to purchase.
To determine if your company or business needs a financial lease or other SME financing, the advice of a specialist in these products is your best option. With their help, you will not only find a wide range of credit products, but they will also be able to carry out the entire contracting process for you at no cost.