Leasing is a popular form of financing that allows many business entities to use various types of assets without having to bear the full purchase costs. This is a flexible option that can be tailored to your individual business needs. Below is a comprehensive mini-guide to leasing that covers the essentials – from important definitions to key legal issues and business benefits.
What is leasing?
Leasing is an agreement in which one entity (the financing party) provides another entity (the user) with specific assets (e.g. vehicles, machines, office equipment) in exchange for a remuneration specified between the parties. The financing party remains the owner of the assets for the duration of the leasing contract, and the user uses these assets on the terms specified in the contract.
Types of leasing
There are several types of leasing. The most common and most popular on the market are, of course, operational and financial leasing. It is worth emphasizing that these concepts are contractual and do not result from any legal regulations.
1. Operational leasing: In this type of leasing, the lessee uses the assets for a specified period of time and then usually returns them to the lessor. This is often the option chosen by companies that want to avoid the risks associated with owning assets.
2. Financial leasing: In financial leasing, the lessee has the option to buy the assets after the end of the leasing contract. In practice, this structure is somewhat similar to an instalment purchase, where the lessee becomes the owner of the asset automatically upon payment of the last leasing instalment, which should be clearly stated in the leasing agreement.
In theory, we can also distinguish:
3. Direct and indirect leasing: Indirect leasing is leasing in the classic code of law, where the financing party undertakes to purchase the item from a specific seller and then lease it. In direct leasing, the subject of the lease is the property of the financing party, so there is no element of intermediation between the financing party and the user.
4. Leaseback: Also known as sale-and-leaseback, it is a transaction in which the owner sells his assets to the financing party and then, under the leasing agreement, as the user, he has the right to use them again.
Leasing benefits
Leasing offers many benefits to entrepreneurs, including:
1. Financial flexibility: Leasing allows to use the necessary assets without having to bear the full purchase costs, which may improve the financial liquidity of a given entity.
2. Technology updates: Leasing allows companies to regularly update their assets, avoiding investing in outdated and rapidly changing technologies.
3. Tax benefits: The cost of obtaining income in operational leasing will be individual leasing instalments, while in financial leasing – depreciation write-offs and the interest part of the leasing instalment.
Legal issues related to leasing
Prior signing a leasing contract, it is worth paying attention to several important legal issues, such as:
1. Terms of the contract: They require special verification, in particular regarding fees (which are not limited to leasing instalments), leasing period, conditions for early termination of the contract or the possibility of assignment.
2. Rights and obligations: This is a very important part of the contract from the perspective of the user, not only in terms of his own rights and obligations, but also the obligations of the financing party, e.g. in the scope of purchasing the leased item from the seller and the rights of the financing party, e.g. in the case of early and sometimes immediate termination of the contract.
3. Liability for damage: The leasing agreement should clearly specify liability for damage caused to the leased property during the term of the agreement and regulate issues related to insurance, i.e. indicate the entity responsible for insurance and its scope required by the financing party.
Leasing is an effective financial strategy for many business entities, enabling the use of necessary assets with minimal financial burden. Before signing a leasing contract, however, it is worth carefully analysing all financial and legal aspects to avoid unforeseen problems in the future.