THE rent-to-own scheme is a popular option for homebuyers. What if the same arrangement can be done for companies who want to acquire big-ticket assets or equipment, but without the huge upfront cash outlay?
In the financial sector, this arrangement is called a financial lease. It can be a viable alternative to what companies might think are the only two options available: an outright purchase or a bank loan.
For tax purposes, however, a financial lease is similar to a bank loan, as leasing companies perform the same function as a bank: financing a client’s acquisition of an asset, which becomes the clean property of the client at the end of the term.
Like banks, leasing companies extend a medium-term credit facility, say three to five years. The difference is that ownership of the asset stays with the lessor while the lessee pays for the equipment until the end of the finance lease. At that point, the lessor executes a deed of sale to transfer ownership of the asset to the lessee.
Financial leases are actually popular among capital-intensive industries, for instance hospitals who need to acquire MRI or CT-scan machines. Construction firms use financial leases to get heavy equipment. Big firms might also want to explore leasing instead of directly buying a fleet of cars for their top executives.
Many companies offer these types of financing arrangements, usually subsidiaries of big banking conglomerates. Industry players include BDO Leasing and Finance Inc., Orix Metro Leasing & Finance Corp., BPI Leasing Corp., LBP Leasing Corp., Japan-PNB Leasing & Finance Corp., UCPB Leasing and Finance Corp., and First Malayan Leasing and Finance.
It’s important to note, however, that potential lessees won’t be dealing with banks. Thus, leasing companies are able to absorb a little more risk.
Like a bank loan, financial leases are covered by a chattel mortgage with a loan value of at least 50 percent of the asset. But big players can be more aggressive and finance loan values of up to 90 percent.
So the big question is, should companies buy or lease?
We talked to one of the bigger players to get the lowdown on leases. There are three advantages, but “it depends on the objective of the lessee,” says Roberto Lapid, vice chairman and president of BDO Leasing.
Big local companies and multinationals may want to improve or protect their financial ratios, and under current accounting standards, equipment under leases do not have to be reflected in the books, he notes.
“There is no asset, there is no liability. Ownership stays with the leasing company. So, if the asset is not in your books, the liability is not in your books. It enhances the financial ratios of those companies,” Lapid explains.
Second, a company might simply want to add another credit facility with a leasing company, so it doesn’t have to touch existing credit lines for its working capital. This way, there is also minimal cash outlay.
Third, there are tax advantages. A company can expense interest and depreciation and thus reduce its taxable income.
These are just some of the advantages of a financial lease. In the succeeding columns, we will tackle other benefits of financial leases, as well as explore another type of lease, the operating lease.
This week, we start a new weekly column in The Business Times, The Corporate Finance Forum, which aims to help companies get the best financial advice to help them expand their businesses. Our inaugural series of columns, which will run for 10 weeks, will tackle a relatively untapped option for the acquisition of equipment: leasing arrangements.