So far, we have talked about the advantages of leasing vis-à-vis buying new equipment, using vehicles and hospital equipment as examples. This week, let’s talk about the advantages of leasing from the point of view of capital and credit preservation.
For growing businesses, leasing can be a viable way to allow expansion while ensuring adequate cash flow.
Directly buying new machines or other equipment however will only tie up cash on fixed assets. But there are other equally important uses of cash flow especially for expanding businesses.
For instance, cash can be used for marketing campaigns to prop up brand awareness. It can also be used for research and development to find out how products could be improved or innovated.
To free up cash, a company can avail itself of a financial lease. As we have discussed earlier, a financial lease is similar to a bank loan, with the leasing company extending credit to finance the purchase of an asset.
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 the end of the lease – normally a three- to five-year period – the lessor executes a deed of sale to transfer ownership of the asset to the lessee.
“So if you take out cash to buy new equipment you will have to touch your capital. One feature of leasing is the minimal cash out,” says Roberto Lapid, vice chairman and president of BDO Leasing and Finance Inc., in an interview with The Manila Times.
As we have also discussed previously, lease payments may be deducted from taxable income, thereby reducing tax payments.
One concern could be the timing of monthly lease payments, especially among manufacturing companies who follow the credit terms of their customers.
Lapid says a leasing arrangement may allow a company’s schedule of lease payments to be in sync with revenue flows, an ideal situation in capital-intensive industries.
A new credit line
Lapid says companies may also look at financial leasing as adding a new credit line, which means they can reserve existing ones for other productive purposes.
“Basically, leasing is like any credit facility which is medium term, meaning it can be from two to five years,” he explains. “They will add another facility, a leasing facility, to be able to purchase or lease an asset in five years.”
“At the end of the day we’re not in the business of accumulating equipment. We’re just financing it for the lessee or the borrower.”