Frequently asked questions

• You preserve your working capital to operate your business,
• Your borrowing capacity remains available,
• Provides economic and fiscal benefits,
• Fixed monthly payments allow you to respond to market developments with more flexibility,
• You pay for the machine while you earn revenue with it.
• You can match expense with revenue in a seasonal fluctuation of payments,
• A leasing company primarily finds its security in the value of the asset and normally does not require as much as a bank.

Op basis van een financial lease overeenkomst financiert de leasemaatschappij een deel van- of de volledige koopsom, waarbij zij de juridische eigenaar van de apparatuur zijn. Wanneer de lessee het leasecontract regulier heeft uitgediend wordt hij/zij economisch eigenaar van de apparatuur.

• In a finance lease the lessor finances the full purchase price or a part thereof, while they obtain legal title to the equipment. After the lessee has paid the final rental under the lease agreement title will pass to him.

• In a finance lease the equipment is invoiced either by the lessor or the supplier.

• As the equipment is invoiced to the lessee he should capitalise the asset on his balance sheet and charge depreciation. If eligible the lessee can recover the VAT with the tax authorities. VAT is normally not included in the lease.

• VAT will be due upon delivery or the startdate of the lease. If VAT is not recoverable by the lessee is may be included in the lease at conditions to be negotiated.

• On a financial sale and leaseback we assume that purchase and delivery took place in the past. The financing is arranged in the form of a loan with a pledge of the assets.

• Subject to credit approval VAT may be included in the finance. In that case VAT will be due over the monthly rentals.

On the basis of an operating lease the lessor provides the equipment to the lessee at a periodical payment (rental). The lessor has both legal and economical title to the equipment.

VAT is due on the  periodical payment (rental). At the end of the lease agreement you normally have the following options:

• Purchase of the asset at an agreed purchase price,
• Extension of the lease term of at least 12 months,
• Return the equipment to the lessor,
• You prevent, particularly for ICT equipment, a mismatch between book value and market value (contingent bookloss).

This final option, the return of equipment to the lessor, clearly demonstrates the difference with a finance lease.

• The asset is not capitalized on the balance sheet,
• There is no effect on your balance sheet,
• You leave residual risk (economic risk) with the lessor,
• You have the option to temporarily increase production capacity,
• By a relatively shorter term you can modernize more quickly.

The purchase option is the price you can buy the assets for from the lessor at the end of an operating lease. If the machine has a useful life of much more than five years, the purchase option price is usually agreed at the start of the lease. This is to prevent surprises at the end of the lease.

The term Fair Market Value is often used in Anglo-American countries to define a purchase option price. At the start of the lease the purchase option price is not agreed but is left to market conditions at end of term. At the end of the lease the lessor may realise a book profit. But a loss cannot be ruled out.

Much depends on how far the lessor amortised the equipment (or the book residual value of the equipment). Much will depend on the market conditions and the negotiation skills of lessor and lessee.

• You have one or more machines,
• You want to generate cash (for instance for new investments or the buyout of a partner),
• The leasing company buys the assets from you,
• A lease agreement is arranged for the equipment while you continue to use it.

Leasing is targeted at machinery and equipment. For instance a vehicle or a crane. It is sometimes about substantial amounts that make your banker frown. With the leasing the customer/lessee immediately has a repayment plan. The investment is no longer dependent upon the bank. Leasing, as an alternative source of finance for the asset, is often attractive to both the supplier and the customer. It improve the chances of closure of the order.

Many suppliers say: ‘How my customer pays for the machine is not my business. I would rather not be involved.’ In fact we see that customer often appreciate our optional guidance towards finance. The least they can expect from us is a better leasing proposal. It does not require much involvement from you as a supplier. Certainly it is behind the screens that Leasecontrol does what is needed to support your customer.

If you invest in machinery and equipment for an amount between  € 2,300 and € 311,243 in 2016 you may be eligible for the small scale investment facility (KIA). (Netherlands only)

The facility is dependent upon the type of asset you invest in. If the asset qualifies you can deduct an amount from your taxable income in accordance with a table. Your corporate or personal income tax is then reduced.

For small and medium size companies an operating lease may be more beneficial than a finance lease. Because the lessor owns the equipment, and you only make use of it, the asset is not capitalized in your balance sheet. As a result the facility remains available.

An often heard argument against leasing is that leasing would be more expensive than a loan from the bank. And indeed if you scan the internet for interest rates on bank loans they are often lower than the implicit rate in a lease. But you have to compare like with like.

Example:

Assume you buy a saw bench or a milling machine worth € 300,000.-.  For a banker the machine has a security value of 70% or € 210,000.-. Your bank will probably be willing to provide a 5 year loan of some 70% or € 150,000.-. The balance you will have to provide yourself or from your overdraft facility. The interest rate on the overdraft facility may look reasonable but commitment fees and credit commission increase the expense considerably. We have made these calculations in the past on the basis of realistic rates and come to the conclusion that bottomline there is hardly a difference between the price of leasing and the interest on a bankloan.

If we assume that you take the bankloan (€ 150,000.- in the example) and the balance is paid with equity that you want a return of 10% for, the comparison lease versus bank turns even more to the advantage of leasing. That is because half of the necessary cash is virtually borrowed from the shareholders at 10% (as the bank only provides € 150,000.- ). The leverage, that you should benefit from, actually works against you.

If you look at quality there are important arguments for leasing:

• In a lease your company will not be asked to provide additional securities while a bank will provide the loan in any case with the securities your company already provided or will have to provide like a pledge of inventories, accounts receivable or mortgage.
• Another advantage of leasing is that a bankloan can be a little soiled if you finance half of the investment with an overdraft facility. Usually there is no repayment schedule for an overdraft facility. It is down to your own discipline if and how you repay the overdraft. A leasing company looks at the economic life of the applicable machine and provides a lease that takes that term into account. If the saw bench or a milling machine have a useful life of 12 years you can probably count on a lease with a term of 7 years
• Finally we note that if the machine is half paid for by cash/equity or overdraft facility the finance is unbalanced. The machine is a  long term asset. If it is partly paid for at the expense of current assets your working capital will suffer.

Are you dreaming about your new company, or have you perhaps progressed in its development? We can help you with your questions about finance. In addition we cooperate with specialized partners in administrative, fiscal and legal issues. Do feel free to get in touch and discuss your challenges.