Leasing is one of the types of financial services, the essence of which lies in lending to the acquisition of fixed assets (for example, automobiles, special vehicles or equipment).
In post-crisis conditions, when obtaining bank loans is very difficult, and attracting long-term investments is a serious problem for Russian enterprises, leasing (financial rent) is the most effective business development technology. It makes it possible to expand the production base of the enterprise, introduce advanced technologies into production, increase the fixed assets of the enterprise, and purchase the latest equipment.
What is the essence of leasing?
The leasing company acquires specific property and transfers it for use to a third party for a long period. In this case, the seller is chosen by a third party.
During the term of the leasing agreement, the consumer pays the cost of the acquired property plus a fee for leasing. After the specified time and payment of the agreed amount, the property becomes the property of the tenant. A collateral is not required for a leasing transaction, and a long installment plan significantly reduces the size of payments and allows you to optimally manage the assets of the company.
The uniqueness of this financial instrument lies in the fact that leasing perfectly combines the characteristics of a long-term lease and a financial loan.
The advantages of this type of investment activity for the consumer:
- Leasing allows you to reduce the tax base of the enterprise since all payments under the leasing agreement are included in the value, resulting in a reduction in income tax;
- The entire amount of VAT under the contract is set off;
- As a result of accelerated depreciation of the leased asset, the amount of property tax is reduced by three times.
What to look for when signing a contract?
The main document that a leasing company must sign with you is a lease agreement. Often there are additional contracts – for example, an insurance contract, or guarantee. It all depends on what property you take and on what terms. In any case, when you make a deal with a leasing company, discuss the details:
- record the requirements for the quality of equipment or vehicles, their configuration and timing of the transfer to you;
- write down what conditions will be considered a violation of the contract (in which case the leasing company can sever relations and take property from you);
- if you do not plan to redeem the property, discuss with the leasing company its allowable depreciation; according to the law, you must return the equipment or transport in working condition, taking into account “normal” wear and tear;
- negotiate insurance.
You will be responsible for the property. If something happens to it through your fault, for example, the machine burns down at the production site, you will still be required to pay the leasing company the full amount under the contract plus payment for the repurchase. Therefore, specify all the risks and who insures property – you or a leasing company.
After you sign a contract with a leasing company, the following documents should remain in your hands:
- lease agreement;
- a deed of transfer of property between you and the leasing company;
- sale contract between the seller of the property and the leasing company;
- an attachment to the contract of sale, which indicates the name of the equipment or transport, their equipment and characteristics or description of the property;
- technical certificate.
When the contract is signed, the leasing company is obliged to:
- transfer property to you in the condition specified in the contract. From now on, you have to carry out maintenance of equipment or vehicles at your own
- expense and repair them, if there are no other conditions in the lease agreement;
- give documents for property (for example, a technical passport), as well as spare or additional parts, if they come with the equipment.
How to pay leasing?
Lease payments are paid in several stages:
- down payment (usually 20-30% of the value of the property);
- regular payments (usually monthly or quarterly);
- payment for the purchase of property.
You make the last redemption payment only if you want to keep the property for yourself. The amount of the buyback depends on the terms of your contract, so read it carefully before signing.
Sometimes you can pay for leasing products. For example, if you lease equipment for field work, the leasing company may agree to accept grain payments from you. In this case, the price of grain is prescribed in the contract.
Regular payments are:
- annuity – you pay the same amount throughout the term of the contract;
- regressive – in the first months you pay more, then the amount of contributions is gradually reduced. This, in fact, is a way to redistribute the debt burden.
If you have a seasonal business, the leasing company can meet you and make up an individual payment schedule: you will pay more in the months when your revenue is higher.
What will happen if you fail to make a payment on time or return the equipment?
If you do not make regular payments, the leasing company will terminate the contract with you and take the property. Moreover, all the costs of dismantling and transportation will fall on you.
Until you purchased the property, it belongs to the leasing company.
But that’s not all. According to the law, if you do not pay twice or delay the payment, the leasing company has the right to debit the amount of your debt from the account from which you previously paid the lease. You can challenge such a write-off of money only through a court.
If under the contract you did not intend to redeem the property, but took it on time and did not return it on time, then you will have to pay a penalty. A leasing company may have its own plans for this property – for example, transfer it to another entrepreneur. And if, because of you, the company violates another contract and pays a fine for it, you will have to, in addition to the penalty, reimburse it for these costs.
Leasing has other pitfalls.
Even if you make payments on time, unpleasant surprises may await you.
Confiscation of property
Some leasing companies may confiscate property, even if you regularly pay bills. This can happen if you violate other important terms of the contract. For example, if you travel by leasing transport outside the agreed region or do not follow the rules for operating the equipment, which may lead to breakage or faster wear. Therefore, you need to carefully study all the clauses of the contract before signing it.
If you believe that you have not violated anything and they have unlawfully taken away your leased property, you can challenge the company’s actions in court.
Refusal to repurchase property
Even if you have specified in the contract that at the end of the lease term you will buy property, an unscrupulous leasing company may refuse to give it in or delay the transfer of rights to equipment, transport or real estate.
In such a situation, you can demand through the court to transfer the property to you, as well as all the necessary documents and compensate for the losses incurred.
Loss of own property
Some companies, under the guise of leasing, offer entrepreneurs and ordinary consumers loans secured by personal automobile vehicles or real estate clients. This is fraught with the fact that at the slightest delay or underpayment, people lose their own cars and apartments. Such a scheme is called reverse lysing.
Reverse leasing is a legal practice. Owners of industrial equipment, ships, aircraft and trains often work with leasing companies in this way.
But recently, companies have appeared that use reverse leasing in order to issue loans to individuals and individual entrepreneurs without a license and without control of the bank.
What is reverse leasing?
In the case of ordinary leasing, the leasing company buys property at the expense of its own or credit money, and then leases it to the entrepreneur. If a businessman cannot make payments on time due to financial difficulties, he or she simply returns the rented transport or equipment or frees up someone else’s premises.
In case of reverse leasing, you sell your own property to the leasing company and at the same time enter into a leasing agreement for it. That is, you get a large amount of money and continue to use the same transport, real estate or equipment, but pay rent for them. And you can buy them back at the end of the lease term.
Such a scheme does not violate the law on leasing. But some companies simply try to circumvent the consumer credit law in this way. Entrepreneurs and consumers are convinced that this is an easy way to get money when you can’t get a loan. At the same time, they assure that no additional risks arise.
How can reverse leasing be dangerous?
The amount of fines and penalties that may be required by banks, microfinance organizations s in case of late payments is limited by law. There are no such restrictions for leasing. Therefore, some companies introduce sky high fines – for example, a penalty for each day of delay may amount to 5% of the loan amount. That is, with a delay of 10 days, the client will have to pay a penalty equal to half the loan.
At the same time, companies that give out loans to private individuals under the guise of leasing are trying to buy a car or a client’s property at a lower price. They assure that it is more profitable for a person – because in this case the size of leasing payments will be lower. At the end of the leasing term, it will be easier for the client to redeem his or her property back.
But in reality, everything is not so simple. The company may state in the contract that it has the right to terminate the contract and take the property if the client delays payment even for a couple of days. At the same time, unscrupulous companies may not specifically indicate mandatory additional costs in the payment schedule. For example, they may not include the cost of insurance. And if the client does not pay it, this may become a reason for termination of the contract. As a result, a person loses the opportunity to buy his or her property back at the same low price at which he or she sold it to a leasing company.
All these risks usually arise if you enter into an agreement with a company that is just hiding behind a leasing scheme in order to cash in on gullible people. Now you do not need to get a special license in order to engage in leasing. Therefore, all responsibility for choosing a reliable partner lies with you.
How to choose a leasing company?
- Choose an experienced company. Many large banks and manufacturing enterprises operate their own leasing companies. Check out their suggestions;
- Carefully read reviews about the companies that you are interested in. Perhaps your friends or colleagues have already worked with these companies and can share their experience;
- Request a balance sheet from the leasing company. They do not always give it a look, but it’s worth a try. The balance sheet will help to understand where the company comes from: whether it takes loans from banks, issues bonds, or the founders invest their own money in its capital. A company with different sources of financing is more reliable than with one;
- Choose a leasing company that specializes in the property you need – for example, in cars. When a company has established contacts with car manufacturers and dealers, it will most likely be easier, safer and more profitable to work with it;
- Find out from the representative of the leasing company what business it most often works with – small or medium, legal entities or individual entrepreneurs. Maybe the company focuses on certain industries – for example, agriculture or high technology. Choose a company that is deeper immersed in the specifics of working with enterprises like yours.
Advice for those who plans to sign a leasing contract
- Choose a reliable leasing company;
- Read reviews, talk with a company representative and its customers;
- Read the contract carefully;
- Before signing the contract, discuss all of its points: the amount and schedule of payments, the terms of the buyback or refund, insurance, interest and penalties in case of delay in payment or untimely return of property;
- Follow the terms of the contract;
- Carefully study all the requirements of a leasing company. For example, it may turn out that you cannot travel outside the city on a leased car. Or the machine should only work a certain number of hours per day. If you violate these conditions, the company may take property from you;
- Follow the payout schedule;
- If you delay payments twice, the leasing company can terminate the contract and take back the property that was leased to you;
- With a competent approach, leasing can be a good investment in your business – new equipment, transport or premises.