Asset Financing: Leasing on Loans

Asset leasing provides unique alternatives to traditional financing for companies to obtain the equipment necessary for their operations. Asset leasing is done as an operating lease or capital lease. Each option has its own effect on the company’s balance sheet, but both provide the company with additional options to finance the assets necessary to expand its business, simplify processes, and generate income. In general, financing with a lease is much easier and faster than traditional financing through loans through a bank.

Operating leases are agreements for the use of assets and do not allow the business entity any ownership rights. Operating leases are more like car or apartment leases, in which the lease payments are made for a set term that is outlined in the contract. The business does not list the equipment as an asset on its balance sheet, in the same way that a tenant cannot list his apartment as his own property.

The benefits of an operating lease are that it can allow companies to save money on maintenance costs, obtain new equipment after the term expires, and use assets for projects they cannot normally complete. For example, a real estate company may use an operating lease for photocopiers for a period of two years. At the end of the term, the company would not have to worry about re-marketing and selling the used copiers, they can simply be exchanged for new machines. This also avoids the need to increase maintenance costs as equipment ages, as maintenance / warranty costs can sometimes be included in lease payments.

Using an operating lease can help a small or new business get what it needs to take on larger projects and hopefully increase revenue. A construction company may choose this to win a bid on a large job, rather than spending possibly tens of thousands of dollars on heavy equipment that can only be used for that particular project. A business could use a short-term lease (perhaps a year) for the equipment needed to complete the job, while paying only part of the cost of that machinery.

Capital leases are sometimes called finance leases because they give a business the same ownership rights as financing with a traditional bank loan. The equipment obtained through the lease is recorded as an asset of the company and the balance of the lease is recorded as a liability. A key benefit of capital leases is that they are easier to obtain than traditional loans and have a variety of payment options. This allows small or new businesses with little or no credit to obtain financing that may not be available to them through traditional means and flexibility in repayment options. Aside from being recorded on the balance sheet, capital leases differ from operating leases in that they typically have longer lease terms.

Equity leases allow companies with weak or no credit to build up their business credit while obtaining the assets needed to expand operations and increase revenue. At the end of the lease term, the business would have ownership rights to the tangible assets that can continue to be used by the business or sold for cash.

These leases can include special financing options to further help companies obtain the assets necessary to generate income while keeping costs and overheads low. Financing programs, such as 90-day deferred or 90-day cash, will give a business the option of using equipment and generating income for three months before the start of lease payments; or an alternative option to buy the equipment outright and avoid finance charges if capital is available.

Another financial option is the use of residuals, or balloon payments, due at the end of the lease term for the entity to own the asset. The residual option allows for lower monthly payments over the lease term, making the asset more affordable and therefore deferring the total cost of interest / payment expense until a later time.

It is not at all uncommon to have a nearly customizable payment option on a finance lease. These options are used for specific industries that can experience large changes in revenue over the course of a year, such as seasonal businesses. These options may allow for a lower payment, or even no payment, during the downtime of a season and the continuation of regular amounts from a particular time of year.