Leasing, Renting, and Factoring: A Business Finance Overview
Leasing
Leasing is a contractual agreement where a leasing company (lessor) purchases an asset on behalf of a business (lessee). The lessee then uses the asset for a specified period, paying periodic installments that cover the asset’s cost, interest, and a predetermined residual value. At the end of the lease term, the lessee typically has three options:
- Cancellation: Return the asset.
- Renewal: Extend the lease at a lower payment.
- Purchase: Acquire the asset at the residual value.
Types of Leasing
- Financial Lease: Offered by financial institutions. Focus is on financing, with repair and maintenance costs typically borne by the lessee. Early termination is often not possible.
- Operating Lease: Offered by manufacturers or distributors. The lessor handles maintenance and repairs. The lease is often revocable by the lessee.
Leveraged Leasing
Involves a leasing company, a lender (bank), and the lessee. The leasing company and lender share the financing of the asset.
Sale-and-Leaseback (Retroleasing)
A company sells an asset to a leasing company and then leases it back. This provides immediate cash flow while allowing continued use of the asset.
Leasing Advantages
- No down payment required.
- Mitigates technological obsolescence risk.
- 100% financing possible.
- Flexible contract terms.
- Tax-deductible payments.
Leasing Disadvantages
- Often irrevocable.
- Can be expensive.
Renting
Renting is a non-financial, medium- to long-term agreement for the use of assets (equipment, vehicles, etc.). There’s typically no purchase option. Renting is governed by general rental contract principles and relevant commercial codes.
Factoring
Factoring involves a business selling its accounts receivable (invoices) to a factoring company. The factoring company then collects the payments from the business’s customers. This provides immediate cash flow but at a cost.
Factoring Advantages
- Reduces administrative burden.
- Provides immediate cash flow.
- Doesn’t affect creditworthiness.
- Improves liquidity.
Factoring Disadvantages
- High cost.
- Some invoices may be rejected.
Confirming
Confirming is a payment management service where a financial intermediary handles payments to a company’s suppliers. This simplifies payment processes and provides suppliers with payment assurance.
Securities Dealers vs. Brokers
Dealers: Investment services companies that trade securities on their own account and for clients. They can also be members of stock exchanges.
Brokers: Investment services companies that trade securities only on behalf of clients. They cannot trade for their own profit.
Portfolio Management Companies
These companies manage investment portfolios for clients, making buy and sell decisions. The client bears the investment risk.
Housing Savings Accounts
These accounts offer tax benefits for individuals saving to purchase a home. The funds must be used for home acquisition within a specified timeframe.
Special Checks
- Certified Check: Guaranteed by the drawee bank.
- Crossed Check: Requires deposit into a bank account.
- Check to Pay into Account: Prohibits cash payment.
- Bank Check/Stop Check: Issued by a bank on behalf of an account holder.
Renting vs. Leasing
Renting: Focuses on operational needs. The renting company handles maintenance and insurance. No purchase option.
Leasing: Focuses on financing. The lessee is typically responsible for maintenance and insurance. Purchase option available.