Many companies opt for leasing rather than standard borrowing because it offers them an opportunity to replace the moveable capital equipment they use in their workplace without having to eat into their equity capital to do it. Interested? Read on to find out more.
Maybe a better question would be “What are the various types of leasing?” Financial leasing is far from the only type of leasing available to companies.
That’s why it’s important to distinguish between the following:
Instead, we’ll focus on financial leases, which are aimed at companies of all kinds – from independent professionals to shopkeepers to large-scale organisations – that want to optimise their investments.
Every financial institution has its own specific processes, but we can still describe how a typical financial lease works in Luxembourg.
In principle, it’s up to you to select your equipment and supplier. Once you’ve made your choice, the selected leasing company buys the equipment and retains ownership of it. It then leases the equipment to you or allows you to use it for a set period of time in exchange for a lease payment. Lease charges can be monthly, quarterly, half-yearly or annual.
At the end of the agreement, you have three options:
Some financial institutions also allow you to opt for non-linear lease payments that track your cash flows.
One of the main advantages is, of course, the fact that the lessor will finance the equipment in full (including paying all VAT up front) and charge you a pre-agreed fixed lease payment for the entire period of use of the asset. Some financial institutions also allow you to opt for non-linear lease payments that track your cash flows. This means that you can reduce your cash holdings while also benefiting from an alternative to traditional borrowing.
Financial leasing also enables you to:
Note that a financial leasing is no longer systematically considered an off-balance sheet operation. Although they are not legally, the lessee is deemed to be the owner of the asset from an accounting point of view in various situations. The item is shown in the assets in the balance sheet and is depreciated as if the lessee were the owner and VAT is due on the monthly lease payments made to the lessor.
If it is nevertheless the lessor who is considered the economic and fiscal owner according to the criteria set by the legislator, then the lessee does not have the asset on its commercial balance sheet. This reduces the apparent indebtedness of the company and leaves room for other short-term financing if required.
It’s important to take the time to properly consider all of the products available to you before picking the one that suits you best. Once a lease has been signed, it’s very hard to amend it.
There are no real disadvantages to opting for a lease, other than the fact that all financial solutions come with a price tag. However, it’s important to take the time to properly consider all of the products available to you before picking the one that suits you best. Once a lease has been signed, it’s very hard to switch to another product that would be better suited to your circumstances. We recommend discussing it with your banking adviser. They understand your line of business and will be able to point you in the right direction.
We wish you and your company all the very best.
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