Passenger car leaseback

Service Business

Entrepreneurs who need to purchase a passenger car for business-related purposes are looking for various financing options for such a transaction. Loans and leasing are still the most popular. A special variation of the latter method is the so-called leaseback. Its main goal is to improve the company's financial liquidity and release frozen funds. What is leaseback? What are the risks and problems associated with it? We will try to answer these and other questions related to passenger car leaseback in the following article.

General principles of leaseback

Sale and lease back is a special form of a leasing transaction, both operational and financial. A characteristic feature in this case is the linking of the leasing contract with the prior sale contract. The principle is simple - the entrepreneur sells the acquired assets to the leasing company (e.g. a passenger car). At the same time, he reserves that the right to continue to use them, under the conditions contained in the leasing contract, will belong to him.

From the moment of concluding such a contract, the financing party (buyer) becomes the owner of a given asset in a legal sense. In reality, however, a given car or machine is still used by the same company (often it does not even leave the premises or plant belonging to a given company). It is worth noting that virtually any asset that is subject to depreciation can be leased back.

What are the benefits of this form of financing?

Leaseback is a good solution for companies that find themselves in a difficult financial situation and need a quick injection of money. The structure of this type of contract means that the company, by selling an asset, increases its current assets, which can then be used in such a way that they bring faster and more income, while allowing the use of the disposed fixed assets.

Such an increase in financial liquidity may turn out to be useful not only in a crisis in the company, but also when a lucrative investment opportunity arises or the entrepreneur intends to apply for a loan.

Depending on the provisions contained in the contract, the leased object may remain with the original owner or be "returned" to the leasing company.

What are the disadvantages of leaseback?

Leaseback is not equally paid for all passenger cars. Due to the quick depreciation of this type of fixed assets, this solution is available for relatively young cars (not older than 3 years).

The problem may arise when valuing a fixed asset, because the sale to the leasing company should be made at the market price, which usually turns out to be lower than the value at which the asset was recorded. Thus, the trader loses on its resale.

Another difficult issue is VAT, especially when the owner of a company (which does not sell vehicles) buys a given car with a view to selling it to the leasing company. In such cases, the tax authorities most often recognize that for the purchase of such a vehicle, the taxpayer can deduct only 60 percent. VAT, but not more than PLN 6,000 zloty. In turn, the sale of this asset should be taxed with the appropriate VAT rate in full at 23%. (provided that he has been using the car for less than six months; this rule is valid until the end of 2013, from 2014 such a transaction will practically always be subject to taxation).

Moreover - nothing is for free. As practice shows, leasing companies often charge themselves considerable margins for buying back vehicles and assuming the risk of impairment and their resale.

As you can see, the leaseback of a passenger car may turn out to be a very good solution in certain situations. Before deciding to use this form of obtaining an injection of money for the company, you should think carefully, analyze all the pros and cons and find an offer that seems to be the safest, and the solutions presented in it will meet the expectations of the entrepreneur.