What is business asset leasing?
Business asset leasing means a leasing company finances a business asset, such as a lorry or a piece of equipment. Depending on the lease type, you either become the user or the leasing owner of the asset. In the lease contract, you record for how long you wish to use the asset. You can also set a term within which you will pay it off. You pay a fixed amount every month to the leasing company, instead of having to spend a lot of money in one go.
What types of business asset leasing can you choose from?
Businesses that want to lease assets can choose between:
With operational leases, you use the business asset while the leasing company remains the owner. So, you rent the asset from the leasing company. You agree on a fixed monthly rate and a lease period. You can also opt for additional services such as maintenance, repairs, and insurance. These services come at an additional cost. At the end of the lease term, the leasing company takes back the asset. They may also sell you the business asset for its current market value, or for a price agreed upon in advance.
Economic risk and costs
Business assets lose value over time as they are used. This is called economic risk. With operational lease, the leasing company owns the asset and so, they bear the economic risk. This makes operational lease more expensive than financial lease.
If you take out a financial lease, you become the owner of the business asset. The leasing company purchases the asset on your behalf and leases it to you. You repay the leasing company each month in instalments until the asset is paid off. In other words, a financial lease is like a loan from the leasing company.
Economic risk and costs
With a financial lease, you own the asset and so you bear the economic risk. As a result, the monthly rate for a financial lease is lower than for an operational lease.
Leasing a car
If you take out a financial lease on a car, you become both the owner and the user. You pay a fixed monthly rate to the leasing company to cover the costs of depreciation, all-risk insurance, motor vehicle tax, repairs, maintenance, and tyres. Costs for petrol and any traffic fines are at your own expense. The leasing company pays for repairs, although an obligatory deductible (eigen risico) also applies. A car lease can last anywhere from 12 to 60 months. After the lease term, you return the car. If you exceeded the annual distance limit you agreed upon, you will have to pay extra.
Operational lease or financial lease?
With operational lease the leasing company runs more risk than with financial lease. The leasing company setts off this risk with your monthly rate. This is why operational lease is more expensive than a financial lease or a bank loan. In return for the higher price, you enjoy greater convenience and fewer risks.
Starting entrepreneurs are usually only eligible for operational lease.
Risk born by:
Benefits of business asset leasing
The 3 main benefits of leasing:
- Leasing business assets is a way to hold onto working capital. Working capital is the money you need to meet your financial obligations, such as buying more inventory, paying suppliers, and paying salaries.
- Leasing companies usually know a lot about their assets and can provide good advice.
- Leasing can be combined with other forms of financing, such as a bank loan. Mixing different forms of financing is a good way to spread risk.