What is leasing?

What type of financing is leasing?

Leasing is a type of financing where you can use company assets without buying them yourself. You enter into an agreement with a leasing company. The leasing company finances the asset and gives it to you via a lease contract. You pay a monthly amount for its use: the lease fee.

Financial lease and operational lease

There are 2 main types of leasing: financial and operational. The main difference? Whether you become the owner of the asset or not.

Financial lease

With a financial lease, the leasing company finances the purchase value, or part of it. You pay back the financing in instalments. The leasing company may ask for a down payment at the beginning of the lease period. Or you pay an amount at the end of the lease (final instalment). You are liable for costs and repairs, and you pay for maintenance yourself. At the end of the lease, you own the asset. During the lease, the leasing company remains the legal owner. 

You are the economic owner of the asset. That means that the asset is on your balance sheet, you are allowed to write it off (depreciate), and often you can deduct the investment from your profit for tax purposes. The lease also countes as a debt. 

Operational lease

With full operational leasing, the leasing company remains the owner of the asset. You use the asset during the lease period, but return it afterwards. It is akin to hiring. You pay a set lease fee per month. 

You list the lease payments as expenses. You cannot claim depreciation on them, nor are you entitled to any investment allowance. The asset does not appear on your balance sheet and therefore has no impact on your business's financial ratios. But: the lease liability does appear on your profit and loss account as part of your operating costs. The operating profit is reduced by the same amount.

Additional costs for maintenance and risks are paid by the lease company. In some cases, you can take over the asset at the end of the lease term for an agreed price or for the current market value.

For whom is leasing a good option?

Leasing is suitable for companies that need business assets but do not want to buy them in one go, or are unable to do so. It is especially useful if you want to preserve your working capital and spread your expenses. 

What does leasing cost?

The cost of leasing consists of the monthly lease payments: the amount you pay for the asset per month. This means you know exactly where you stand and can factor the costs effectively into your financial planning. Over the entire term, leasing may be more expensive than buying, but it can actually work out cheaper than a business loan.

Duration and flexibility

The duration of a lease contract is tailored to the economic lifetime of the asset. Does the object have a longer economic life? Then the leasing company usually agrees to a longer term. You can also combine leasing with other sources of financing.

How do you apply for a lease contract?

You apply for a lease contract with special leasing companies, banks, or other financiers who have leasing in their package. You usually apply online. Before you submit an application, check what information the financier wants from you. For example, company details and financial statements.

To apply, follow these steps:

1. Decide what you need: consider what type of equipment or vehicle you want to lease and for how long. And how much money you want to put in yourself.
2. Compare providers: find different leasing companies or other providers and compare their terms, costs, and additional services.
3. Get quotes: contact providers and request price quotations. This will help you get an idea of the costs and conditions in your situation.
4. Assess the price quotations: compare the quotations based on price, conditions, flexibility, and service.
5. Choose a provider: make a choice based on your assessment.
6. Submit your application: complete the (online) forms and provide the requested documents from the provider you have chosen.
7. Sign the contract: read the contract carefully. Ask questions if anything is unclear and sign the contract if you agree.

What you must pay attention to

Pay attention to the conditions of the lease. Especially look at what happens at the end of the lease contract and what costs are if you want to repay earlier, or cannot pay anymore. The contract will state the compensation you will have to pay.

Help with business financing

KVK’s Financing Guide helps you find the financing that suits your situation. Do you still have questions? Call the KVK Advice Team on 088 585 11 11 or ask an expert.

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