Leasing - basic rules

Service Business

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Author: Michał Błauciak, Ideashirt.pl

According to the current understanding of the word, leasing is a relatively new financial instrument. The development of modern leasing took place in the United States of America after World War II. Technical progress, increased competition and high costs of purchasing means of production resulted in the appearance of leasing companies on the market. The first was established in San Francisco in 1952 under the name of United States Leasing Corporation. The company was engaged in leasing of production resources for the food industry.

The leasing form of investment financing has developed quite quickly. Rapid technical progress and the related need to modernize production as well as increased competition and customer requirements meant that already in the 1980s in North America, approximately 30% of investments were financed through leasing. The success of this form of financing has also been noticed in Western Europe and Asia. Ten years after the establishment of the United States Leasing Corporation, leasing companies began operating. In Polish reality, it began to be used in the early nineties, while the leasing contract was precisely specified only in 2000 by standardizing art. 709: By the leasing contract, the financing party undertakes, in the scope of the activities of his enterprise, to purchase the item from the designated vendor under the conditions specified in this contract and give these items to the user to use or use and receive benefits for a specified period, and the lessee undertakes to pay the financing party in the agreed terms in installments, cash remuneration, at least equal to the price or remuneration for the purchase of goods by the financing party.

Leasing is a specific agreement as it combines the features of a lease agreement with a loan agreement. The common feature of these two contracts is financing the purchase of durable goods and putting them into use. In this respect, it has the characteristics of a lease contract, as it transfers the purchased goods for use without the user acquiring the ownership of the subject of the contract during the term of the contract. The similarity to a credit agreement comes down to giving the future user of the subject the full right to choose the purchased item and the right to designate the vendor. The role of the leasing entity here comes down, as in the case of a loan agreement, to financing the purchase of strictly defined goods. The second feature that makes the leasing contract similar to a loan contract is the final transfer to the user of the ownership of the financed item. In the loan agreement, the ownership of the financed item remains with the borrower. In practice, this ownership is often limited, until the loan is fully repaid, by establishing various types of legal restrictions securing the loan. In the leasing contract, the ownership of the financed item remains with the financing entity until the contract is fully settled. After this period, the user of the goods acquires the right to transfer ownership of the used thing. It can therefore be assumed that the essence of the leasing contract is financing the purchase of durable goods, their temporary return for use to the user, with the possibility of transferring the ownership right after the end of the contract.

The types of leasing contract are divided into two aspects. The first is the number of entities involved in the transaction. Here, direct leasing is distinguished - the manufacturer concludes a contract directly with the user (two entities - the manufacturer is also the lessor) and indirect leasing - it comes down to including between the lessee and the supplier the entity financing the entire transaction, i.e. the lessor who purchases on its own account and then rents it out. the lessee the subject of the lease. The second aspect is the nature of the obligations between the parties to the contract. Two types are distinguished here: financial and operational. In financial terms, the user uses the leased asset in a period close to its economic use. The rent payments cover the entire expenditure and the profit of the financing party (lessor). Item

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the lease is owned by the financing party, it is depreciated by the user, while the transfer of title may be guaranteed in the contract. Therefore, the company increases the value of its assets without incurring additional costs after the end of the contract, and the increased form of depreciation allows you to regulate its costs and income. In financial leasing, the lessee does not include the fees related to the leased object (taxes, insurance, maintenance costs). It is a full cost and profit return for the duration of the contract. The principle of total depreciation is adopted and therefore these are medium and long-term contracts (3-10 years). In an operating liability lease, the leased object may be and will be used by many successive lessees. The amount of leasing fees does not fully amortize the financial outlays incurred by the financing entity during the duration of only one contract. The complete amortization of costs and the achievement of the planned profit takes place only in the cycle of subsequent contracts, the subject of which is the same thing. Leasing installments constitute a tax-deductible cost for the Beneficiary, and the subject of the lease is not subject to depreciation. In the operating lease agreement, the user may also be guaranteed the right to purchase the leased asset after the end of the contract, for a predetermined residual value plus value added tax (VAT). For the lessor, an important element is to maintain the proper use value of the object, so he usually guarantees the possibility of supervision over the object in the contract, but he bears all the risk related to the thing. A variation of operating leasing is wet leasing, in which additional services are provided on the basis of the contract (e.g. fuel for the aircraft which is the subject of the contract)

Leasing as an instrument for financing enterprises is very favorable in the macroeconomic aspect. Although a mechanical reduction in the refinancing loan rate will stimulate the economy, its amount depends on the macroeconomic situation and must be adjusted to it. Otherwise, the cut may cause irreversible consequences related to driving the inflationary spiral. Therefore, leasing is an ideal solution, as it stimulates the economy, and at the same time is largely neutral in terms of its impact on inflation mechanisms.

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