2024 CLFP Recertification
Educational Content: Benefits of Leasing
Benefits of Leasing
With new regulations and monitoring in our industry, there has been a shift with many organizations offering Lease Agreements instead of Equipment Finance Agreements (Loans). Along with being exempt from certain regulatory requirements, Leasing offers several benefits depending on the context and individual needs of the borrower. With the increased popularity of offering Leases, we will discuss the common advantages associated with Leasing as well as how a Lease can differ from a Loan for the Borrower.
Advantages of Leasing:
- Lower Upfront Costs: Instead of a substantial down payment, the borrower typically pays a smaller upfront fee, followed by regular monthly payments throughout the Lease term. This can make it more affordable to acquire and use assets, especially for borrowers with limited capital. Monthly payments, as well as end-of-term options, will vary depending on the type of Lease initiated.
- Access to Newer Assets: Leasing enables the borrower to utilize the latest models or technologies available without the long-term commitment of ownership. This is particularly advantageous in rapidly evolving industries where technology quickly becomes obsolete. Through Leasing, the borrower can frequently upgrade to newer or more advanced assets, ensuring access to the latest features and functionalities. This can also create additional opportunities for repeat financing with valued customers.
- Flexibility and Convenience: Lease terms can be negotiated to match specific requirements, such as the length of the lease period, monthly payment amount, and end-of-lease options. Depending on the Lease type, the borrower has choices to return the asset, renew the Lease, or purchase the asset at a predetermined or fair market price. This flexibility empowers the borrower to adapt to changing needs and market conditions.
- Preservation of Capital and Credit Lines: Leasing enables the borrower to preserve capital for other investments or expenses. By avoiding substantial upfront payments, the borrower can maintain cash flow and liquidity. This is particularly advantageous for borrowers who wish to strategically allocate their financial resources. Additionally, leasing typically doesn’t impact credit lines, leaving them available for other business or personal needs.
As organizations consider their financing options, the advantages of Leasing stand out, providing a flexible and cost-effective approach to acquiring and utilizing assets. It’s essential to fully assess individual needs and financial goals to determine whether a Lease or a Loan better suits the situation.
Key Differences Between a Lease and a Loan:
|Ownership||The lessor retains ownership of the asset throughout the lease term. The lessee has the right to use the asset in exchange for regular lease payments.||The borrower takes ownership of the asset or property being financed. The lender provides funds for the purchase, and the borrower repays the loan over time based on a stream of payments.|
|Purpose||Often used to acquire the temporary use of an asset. Common for equipment, vehicles, or technology that may become outdated or require frequent upgrades. This allows the lessee to use the asset without the long-term commitment and responsibilities of ownership.||Typically used to finance the purchase of an asset or property. Commonly used for real estate, vehicles, or large equipment, where the borrower intends to own the asset outright at the end of the loan term.|
|Payment Structure||Payments are typically made in regular installments over the lease term with the option of a final lease payment. The lessee pays for the use of the asset but does not build equity or ownership in the asset.||Repayments usually consist of both principal and interest calculated in one monthly payment. The borrower gradually pays off the loan over time, building equity in the asset until it’s fully owned.|
|End of Term||There are several options, depending on the lease agreement. The asset could be returned to the lessor, the lease could be renewed for an additional term, or the lessee could exercise the option to purchase the asset at a predetermined or fair market price. When considering lease options, financial institutions should factor in the residual risk of a lease, especially with the volatility of the used equipment market currently. Additionally, the ability to remarket any returned assets should also be considered when determining what types of leases to offer the borrower.||Once the borrower completes the repayment, they become the outright owner of the asset. The borrower has full control and can use, sell, or dispose of the asset as they see fit.|