Equipment Leasing - Is it Your Cup of Tea?

Leasing has prevailed since ancient times. Ancient clay tablets from 2000 B.C. record the leasing of farm implements. Ancient Phoenicians leased ships using very specific residual assumptions, thus making equipment leasing the world’s oldest form of finance. What started as a necessity, soon became a very efficient model for the asset owner and lessee.

Today, all types of personal property can be leased, including equipment used in transportation, manufacturing, mining, medical applications, software, intellectual property and even artwork. And where would commercial real estate be without leasing? Even the house we live in as a tenant is a lease!

Why do Companies Lease?

From a company’s perspective there are extensive benefits to leasing when it comes to investing in capital equipment, especially when compared to a cash purchase.

• 100% of the rentals (both the capital repayment and interest) are tax deductible for a profit making company;
• In most cases no large deposit is required;
• Repayments are fixed which makes for easy budgeting;
• Maintains other credit lines;
• Flexible term ranging from 1 to 5 years;
• Easy to upgrade when you need to replace ageing equipment with new ones;
• Almost all equipment types can be funded;
• Allows the equipment to pay for its self over the time period;
• Most importantly, it protects your cash flow to cover future unexpected costs or just to give you the peace of mind knowing your money is in your bank account and not tied up in equipment.

Why do People  Invest in Leasable Assets?

Equipment leasing platforms allow you to pool your money with other investors to invest in capital equipment that can be leased to businesses. The equipment will be sold directly to the lessee as part of a lease-to-own program. Assets which are leased can be electric bikes, batteries, furniture, etc.

What are its Advantages?

There are the 3 major advantages:

1. Consistent Cash Flow

Fixed lease payments are provided for consistent and high distribution rates throughout the operating periods of most programs.

2. Low Correlation

Thoughtfully underwritten leasing receivables have an ability to withstand the biggest hits to both equity and debt markets.

3. Strong Collateral

Leasing typically provides the lessor with a purchase money security interest (PMSI), meaning the lessor legally owns the equipment. Contrast this with a loan where the lender may have a lien on an asset, which is a significantly weaker position than a PMSI.

Business Model Explained

Let's take an example. Let's assume your asset is Rs. 100 at the start of the leasing period, the company deposits Rs.15 as security and leases the equipment for 3 years. It pays the investor every month and at the end of the 3rd year, it buys the equipment for Rs. 40. At the end of the first year, once you add the security deposit + cashflow, almost 50% of the amount is secured by the investor.

Risk Management

• Rigorous due diligence of leasing partners;
• Asset ownership is retained by investors through terms to recover investment;
• Security deposit is taken from leasing partner and escrow account mechanism;
• Monthly payout reduces investment outstanding;
• 40+% recovery of investment amount within 12 months

Analysis of a Deal

Deal: E-Scooter Leasing for Zypp

Key Leasing Terms

• Title of the bikes will not transfer to Zypp and the bikes will be handed back in case of termination;
• Purchase price for the bikes is reduced by subsidy received under Govt. of India’s promotion scheme for electric vehicles;
• Complete compensation in case of loss of the e-two wheeler will also be the responsibility of Zypp;
• Zypp is responsible for registration, consent, or approvals required under all applicable laws, and is solely liable for any liability arising under these laws;
• It is also responsible for all repairs (whether routine or resulting from any damage or accident), maintenance, and running costs of the bikes;
• Zypp will pay a security deposit equal to 3 months of lease income in the form of a bank guarantee. The same will be returned to Zypp at the end of the lease term or settled against the residual value paid by Zypp to purchase the vehicles;
• 0.5% of rental income earned is retained for management expenses and insurance costs of the lease. An additional 0.5% of the rental income earned is retained as Grip's advisory fee.

The Cashflow

Net IRR =12% Money Recovered in 1 year = 50% Security = 3 Months Cashflow Tax on Cashflow= 0% Yield of Someone at 30% tax rate (factoring tax saving)= 12%/69% = 18%

This article has been written by Rohan Rautela, owner of financial blog, Random Dimes. Check out his website to read more such articles. Happy Leasing!

Subscribe to our page to know more about Grip, the latest financial knick-knacks and shenanigans that take place in the world of investing!