What is leasing?
- Gé Sletterink
- The basis
- 5 Jun 2023
- Edited 11 Nov 2022
- 4 min
- Managing and growing
Leasing is a type of financing that you use for business assets. Think of company cars, machines, computers, or photocopiers. The leasing company finances the asset, and you pay a monthly fee for its use. Learn more about how leasing works.
Leasing is an important form of financing for the Dutch business community. SMEs conclude more than two-thirds of lease contracts. This means the leasing industry is a major source of finance for SMEs.
This is how leasing works
Do you lease any business assets? Then you have an agreement with a leasing company. The leasing company finances the asset and leases it to you for use or ownership. You pay a monthly amount (lease instalment) to the leasing company for the use of the business asset. Depending on the lease form, you become the owner of the asset directly. Or you determine this at the end of the lease period. Because you pay the value of the asset in instalments, you do not have to make a large investment in one go. This way you keep operating capital in your company.
Types of leasing
The best-known forms of leasing are financial lease, operational lease, and private lease.
With a financial lease, you take out a loan, as it were. The leasing company finances the full purchase value (100% financing) of an asset, for example, a new machine. You become the owner of this machine and repay the financing in instalments. You also carry the economic risk.
With an operational lease, the lease company remains the legal and economic owner of the asset. You rent that object. Besides the right of use, you can also buy additional services, such as maintenance, repairs, or insurance. This increases the amount you pay each month, the lease instalment. At the end of the lease term, the leasing company takes back their asset. Or they offer you the asset for the current market value or a fixed price.
Private lease is when private individuals lease a car and pay a fixed amount per month. This amount covers the costs of depreciation, all-risk insurance, motor vehicle tax, repairs, maintenance, and tyres. You pay for the fuel, any traffic fines, and an insurance excess in the event of damage. The leasing company remains the owner of the car. You rent the car for a minimum of 12 to a maximum of 60 months. You return the car after the agreed lease period. The leasing company will then settle any extra fees for the kilometres driven and any unacceptable damage. There is no additional tax liability. That only applies to lease drivers with a company car. Learn more about private lease for self-employed professionals.
Leasing can be convenient but more expensive
The leasing company carries more risk with an operational lease than with a financial lease. Therefore, it adds this to the monthly lease instalment price. This makes an operational lease more expensive than a financial lease or a bank loan. In exchange, you benefit from the convenience and have fewer economic risks. Decide which lease form is suitable for you and your company.
Advantages of leasing
Leasing can be cheaper than a business loan. This applies in particular to equipment with a purchase value of less than €50,000. A business loan is often more complex to arrange and is therefore more expensive. With a 'customised' lease contract, the monthly costs are usually lower. For example, with a financial lease with an increased final term, or with an operational lease with a large residual value. This makes more expensive, high-quality business assets financially beneficial for you.
Table: Monthly payments for an excavator
The purchase value of an excavator €80,000, via financing and lease
|Interest on financing
|Total monthly costs
The convenience of leasing
Does something break? Or do you have problems due to wear and tear? In that case of an operational lease, the leasing company is responsible for providing a quick solution. Leasing is also interesting for equipment that you often have to update. You can access new technology more easily and quickly to stay competitive.
With leasing, you can take 100% financing. Unlike a bank loan, you do not have to use your own funds to use the asset. So there is less pressure on your liquidity position. The term of a lease contract is also based on the economic life of the asset. For assets with a longer economic life, the leasing company usually accepts a longer term. Finally, you can use leasing on top of or next to other financing sources.
The disadvantages of leasing
Do you want to lease a business asset? Then consider the following disadvantages and other points of attention.
List all costs
List and compare the costs of a lease with, for example, a bank loan. With a loan, include any closing commission, management fees, administration costs, the actual repayments, and of course the interest costs.
Lease contract details
Record the lease agreements in a lease contract. Customise that contract to your business form and industry characteristics. Include a remaining or final term in the contract. This means that you still have to pay part of the financing amount at the end of the term. The advantage of this is that you do not have to make all repayments during the term of the financing. You will of course pay the interest on this part during the entire term. Also pay attention to the length of the lease period. Does this match your needs? After all, you do not want to pay for an asset any longer than necessary.
Read the fine print of your lease contract. For example, what happens if you can no longer meet your obligations or if you want to end the contract earlier? If you end a contract, the conditions state if and how much of a fine you must pay. And what conditions does the leasing company set for repairs and maintenance? What happens if your equipment is being repaired when you need to carry out urgent work? Will you receive compensation or a replacement?
The leasing company
With leasing, you enter into a contract with the leasing company. What does the leasing company have to look out for?
The leasing company pays attention to the economic risk and the change in value (legal risk) of the business assets they deliver. What risks are associated with the use of the business assets that you want to lease? Do the assets keep their value? This affects the lease amount that you pay.
The leasing company looks at the financial situation of your business. Can you meet the obligations during the entire term of the lease contract? Can you pay the monthly lease instalments on time?
Marketability and credit risk should be considered together. Is the value of the asset high and will it remain high during the entire lease contract? Then the leasing company considers the financial situation of your company relatively less important. Does the value of the assets decrease quickly? Then your qualities as a debtor are very important to the leasing company.