Leasing as a form of renewal of fixed assets

Currently, most enterprises in the Republic of Belarus, both new and functioning for a long time, are in dire need of modern and efficient equipment. The reason for this is the physical deterioration of a significant part of the fixed assets used in entrepreneurial activity, accelerated obsolescence, the emergence of new generations of equipment, etc. Enterprises have three opportunities to modernize production on a new technical basis: first, to buy equipment at the expense of: own funds; secondly, to take a loan for the purchase of equipment; thirdly, to lease the equipment.

In conditions of limited own financial resources, leasing is the most effective form of updating fixed assets.

There are many definitions of leasing, but any definition of leasing is limited and cannot take into account all the manifestations of this new instrument.

The European Federation of National Equipment Leasing Associations understands leasing as a lease agreement for a plant, industrial goods, equipment, real estate for the use of them for production purposes by the lessee, while the goods are bought by the lessor and he retains ownership, i.e. leasing is a form of lease associated with the transfer for use of machinery, equipment, transport and other material means.

The essence of the leasing operation is the provision by one party – the lessor, the other party – to the lessee of property for exclusive use for a specified period for a certain fee on the basis of a leasing contract.

The purpose of leasing is to promote the development of NTP, the development of the material and technical base of the enterprise, their technical re-equipment, the expansion of cooperation between domestic and foreign enterprises.

Three parties are involved in the leasing transaction:

1 Lessor (lessor)  is a specialized leasing company that acquires property in ownership and transfers it for temporary use for a certain fee;

2. Lessee (lessee)  enterprise leasing property;

3. The seller is  the manufacturer of the necessary property.

Banks that provide loans to the lessor for the purchase of property and insurance companies can take part in this transaction. In addition, the following may act as a lessor; banks, through their leasing services; leasing companies established by firms engaged in the supply and maintenance of equipment.

The tenant independently or with the help of a leasing company chooses the seller of the necessary equipment. A lease agreement is drawn up between the leasing company and the lessee, which stipulates the terms of the lease, the amount of rental payments, the terms of payment, the terms of insurance of the leased object, possible redemption options and other conditions. The lessor retains ownership of the property leased.

The market of leasing services is characterized by a variety of forms of leasing, models of leasing contracts. The types of leasing are shown in Table 2.4.

Table 2.4.

Classification of leasing

According to the mechanism of leasing, direct and repayable are distinguished. With direct leasing, the lessor buys the property from the supplier and delivers it to the lessee, receiving rent for the entire lease term. This type of leasing is advisable in cases where the lessee completely re-equips its production. With a leaseback, the manufacturer sells its property to the leasing company and at the same time concludes an agreement on the long-term lease of this property on a leasing basis, i.e. becomes from the owner of the property to its lessee.

In domestic practice, leaseback is necessary for those economic entities that urgently need significant amounts of working capital.

An important advantage of leaseback is the use of equipment already in operation as a source of financing for new facilities under construction with the consequent opportunity to use the tax benefits provided for participants in leasing operations. Repayable leasing makes it possible to refinance capital investments with lower costs than when attracting bank loans, especially if the solvency of the enterprise is questioned by lending organizations due to the unfavorable ratio between its own and borrowed funds.

According to the degree of payback of the leasing object, it is divided into operational and financial.

Operational leasing is a leasing with incomplete payback, in which during the term of one leasing contract there is a partial depreciation of the property and only a part of it pays off.

Financial leasing is a lease with full payback, when during the term of the lease agreement there is a full or close to full depreciation of the property and, accordingly, payment to the lessor of the value of the property.

After the expiration of the lease agreement, the lessee can buy the object of the transaction at the residual (and not at the market) value, which is determined by the parties in advance, conclude a new contract for a shorter period and at a preferential rate, or return the object of the transaction to the leasing company.

The advantages of leasing as a form of production renewal are as follows:

First, leasing allows you to switch to a new technological base at a lower cost. Such an operation is possible due to the fact that leasing companies assume the risk associated with the obsolescence of the means of production. The lessee has the opportunity to get rid of obsolete equipment long before the end of its service life and lease more efficient models, i.e. to pursue a flexible technological policy; Secondly, the development of leasing makes it possible to overcome such an obstacle to the technical modernization of production as a shortage of financial resources, including foreign exchange funds. The possibility of carrying out the reconstruction of production without significant capital investments in new equipment leads to the release of internal financial resources for use for other purposes; Thirdly, leasing involves 100% lending and does not require immediate payments. With the use of a conventional loan for the purchase of machinery and equipment, the enterprise would have to pay about 15% of the purchase price from its own funds. When leasing, the contract is concluded for the full value of the property. Lease payments usually begin after the delivery of the property to the tenant or even later; Fourth, it is much easier to get a leasing contract than a loan. This is especially true for small and medium-sized enterprises. Some leasing companies do not even require additional guarantees from the tenant. It is assumed that the security for the transaction is the equipment itself. If the lessee fails to fulfill its obligations, the leasing company immediately takes the property. In the case of a loan, sufficient collateral is required; Fifth, a leasing agreement is more flexible than a loan. A loan always involves a limited maturity and repayment amount. With leasing, the lessee can calculate the receipt of his income and work out with the landlord an appropriate, convenient for him, financing scheme. Payments can be monthly, quarterly, etc., payment amounts may differ from each other. Sometimes repayment is carried out after receiving proceeds from the sale of goods produced on leased equipment; Sixth, no borrowed capital is attracted. Leasing does not reduce the liquidity of the balance sheet and helps to maintain an optimal ratio of equity and borrowed capital. It does not limit the short- and medium-term limits of lending to the enterprise for additional purchases of raw materials and materials, which is necessary for the expansion of production. This is a significant advantage of financing the purchase of modern equipment through leasing; Seventh, since leasing has long served as a means of selling products and developing production, state policy is usually aimed at encouraging and expanding leasing operations and is expressed in tax incentives. The profitability of using equipment on the basis of leasing is that the equipment does not become on its balance sheet, and leasing payments are attributed to the cost of production, which provides financial savings by reducing real estate tax and income tax; Eighth, leasing allows you to respond quickly to changes in market conditions when purchasing the necessary equipment; Ninth, the purchase of leased equipment is made at optimal market prices. Not only the lessee, but also the lessor is interested in minimizing the price of equipment, and the latter also has a deep knowledge of the market; Tenth, a wide range of related services for the adjustment and maintenance of purchased equipment is often offered.

Thus, if the company needs additional investments and is confident in the correctness of its decision, then it should turn to those who will help to skillfully finance the project, i.e. to a well-established leasing company.

First of all, the company needs to clearly understand what property it is interested in and at what price, whether it will look for a supplier itself or the lessor will do it, for how long the company will be able to buy it out and what guarantees it can provide in repayment under the lease agreement.

Based on the terms of the leasing agreement, payment for the transaction is made according to the schedule for calculating leasing payments and the residual (redemption) value. However, when agreeing on the term of the contract, it should be borne in mind that the extension of the term increases its value, since the risks of the lessor increase completely, respectively. The lessee has a real opportunity to become the owner of the property in a short time (for 12 or more months).

Lease payments may include:

full (or close to it) value of the leased object; the amount paid to the lessor for the use of credit funds for the purchase of equipment under the leasing agreement; the cost of services to the lessor (commission); the cost of property insurance, if it is insured by the lessor; other costs of the lessor provided for in the contract.

There are different ways to pay for leasing:

establishment of increased payment rates in the initial terms of the lease, which are gradually reduced as the value of the leasing object is covered; establishment of low payment rates in the initial terms of the lease, which increase as the leasing object is mastered by the lessee; payment is made in equal installments during the lease term.

Leasing is a relatively new sphere of entrepreneurial activity in the Republic of Belarus. In the last decade, it has become increasingly common. Currently, there are more than 40 leasing companies in the republic. Among them are Priorleasing, MAZcontractling, MTW leasing, Belagropromleasing, Technoleasing, STOLITSA leasing, etc.