Leasing as a method of lending to foreign economic activity

Leasing is a long-term rental of machinery and equipment, vehicles, a way to finance investments, alternative to bank lending, and boost sales. This form of lending has been used since the 50s. In the 60-70s, multinational leasing companies arose. Such companies provide companies with equipment, ships, aircraft, etc. for rent for a period of 3 up to 15 years or more without transfer of ownership.

The features of leasing operations compared to traditional leases are:

the choice of the leased object remains with the tenant, not the lessor; the leasing period is less than the physical depreciation of the equipment and is approaching the tax depreciation period

(3 – 7 years); at the end of the leasing agreement, the tenant may prolong the lease at a preferential rate, either purchase the leased equipment at a residual value, or return it to the leasing company.

Leaseman is a financial institution – a leasing company.

Participants in a classic leasing transaction are:

1) the lessor is the owner of the leased item; 2) the lessee (tenant) is the user of the leased item; 3) the supplier is the seller of the leased item.

International practice has developed certain forms of leasing transactions, the most common of which are standard leasing, return leasing, wet leasing, net leasing, leasing for residual value, full service leasing, etc.

The standard leasing is a manufacturer’s sale of equipment to a leasing company that rents it for rent. A feature of this form of leasing is the lack of legal relations between the manufacturer and the lessee until the question arises of the maintenance of the equipment.

Return leasing is one of the forms of leasing used when the equipment owner company is experiencing financial difficulties. The essence of such an operation is that the owner of the equipment sells it to a leasing company, and then rents this equipment, thus turning from the owner into a tenant.

“Wet Leasing” provides for the provision of additional rental services to the lessee: equipment maintenance, repair, installation, etc.

“Clean Leasing” is a leasing, the responsibility of which lies entirely with the tenant, who pays taxes and fees, provides insurance, and also bears all the costs associated with the use of equipment.

Leasing to the residual value of the equipment applies to used equipment.

Full service leasing. This form of leasing is in many ways similar to “wet leasing”. The difference lies in the wider range of additional services provided by the lessor: for example, conducting research prior to the acquisition of equipment, delivering the necessary raw materials to ensure the functioning of the leased equipment, the provision of qualified personnel for working with equipment, etc.

Leasing operations, despite the relatively recent appearance, have gained great popularity in the world market, as they provide a number of significant advantages for all participants in the transaction. So, the lessee (tenant) has the opportunity to carry out and increase production without accumulating capital for acquiring equipment into the property, thus avoiding freezing capital. In addition, the tenant, not having his own capabilities, can resort to the services of the owner for the maintenance and repair of equipment, especially when it comes to sophisticated new equipment. Another advantage for the tenant is the maturity of his receivables, which begins after the installation of the equipment and the achievement of the corresponding productivity, i.e., the tenant immediately begins to make a profit, part of which can be used for rental payments. There are other advantages for the lessee (tenant), among which are the following: inclusion of rent in the cost, provision of 100% financing of the transaction (unlike regular lending, which provides for partial payment of up to 80%), the release of the tenant from the procedures and expenses for owning property, the ownership right, according to which the lessor and others are assigned.

The lessor, in turn, reduces the risk of insolvency of the tenant, expands the range of operations performed, attracts new customers, charges depreciation after the property is placed in the balance sheet, leaving the profit in reserve without taxation, increasing, thus, their own self-financing capabilities and others.

The main advantage for the manufacturer is to receive cash payments, which expands its financial and other opportunities.

Despite a wide range of advantages, leasing also has a number of negative aspects: firstly, leasing with a relatively short term of use may turn out to be economically unjustified for the tenant; secondly, upon expiration of the lease term, worn-out equipment is returned to the owner, unless otherwise provided by agreement; thirdly, leasing may be more expensive than obtaining borrowed funds for the purchase of equipment and others.

Thus, the question of choosing leasing or buying is decided on the basis of the analysis of the above advantages and disadvantages of leasing, as well as taking into account the financial condition of the enterprise, economic feasibility and characteristics of the equipment itself.