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!
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.
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.
There are the 3 major advantages:
Fixed lease payments are provided for consistent and high distribution rates throughout the operating periods of most programs.
Thoughtfully underwritten leasing receivables have an ability to withstand the biggest hits to both equity and debt markets.
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.
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.
Deal: E-Scooter Leasing for Zypp
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!
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