Financial leasing management
Financial leasing satisfies the need for the most scarce type of borrowed capital – a long-term loan. Fixed assets transferred to financial leasing are included in the fixed assets of the lessee. The main goal of managing financial leasing from the standpoint of attracting borrowed capital is to minimize the flow of payments for servicing each operation. The process of managing financial leasing in an enterprise is carried out in the following main stages.
Financial leasing (leasing) is a business operation that involves the lessor acquiring fixed assets by order of the lessee with further transfer to tenant for use for a period not exceeding the period of their full depreciation with the obligatory subsequent transfer of ownership of these fixed assets to the lessee. Financial leasing is considered as a type of financial loan. Fixed assets transferred to financial leasing are included in the fixed assets of the lessee.
Credit relations of financial leasing are characterized by multidimensionality, manifested in a fairly wide range.
1. Financial leasing satisfies the need for the most scarce type of borrowed capital – a long-term loan. At the present stage, long-term bank lending to enterprises is minimized. This is a serious brake on the implementation by enterprises of investment activities related to updating and expanding the composition of their non-current assets. The use of financial leasing for these purposes allows us to satisfy the needs of the enterprise in attracting a long-term loan.
2. Financial leasing provides the full amount of satisfaction of the specific target needs of the enterprise in borrowed funds. The use of financial leasing for specific purposes of updating and expanding the active part of operating non-current assets allows the company to completely exclude other forms of financing this process from both its own and borrowed capital, and reduces the enterprise’s dependence on bank lending.
3. Financial leasing automatically forms the full security of the loan, which reduces the cost of attracting it. The form of such loan collateral is the leased asset itself. An additional form of loan security is compulsory insurance of the leased asset by the lessee (renter) in favor of the lessor (lender). The reduction in the level of credit risk of the lessor (and, accordingly, its risk premium) creates the prerequisites for a corresponding reduction in the cost of attracting this type of financial loan by an enterprise (in comparison with a bank loan).
4. Financial leasing provides coverage with a “tax shield” of the entire volume of a loan. Leasing payments, which provide amortization of the entire amount of the principal debt on a loan, are part of the costs of the enterprise and accordingly reduce the amount of its taxable profit. For a bank loan, a similar “tax shield” applies only to payments for servicing a loan, and not to the amount of the principal debt on it. In addition, a certain system of tax benefits applies to the lessor.
5. Financial leasing provides a wider range of forms of payments related to debt servicing. Unlike a bank loan, where debt servicing and repayment of its principal amount is carried out in the form of cash payments, financial leasing provides for the possibility of making such payments in other forms, for example, in the form of deliveries of products made with the participation of leased assets.
6. Financial leasing provides greater flexibility in terms of payments related to debt servicing. In contrast to the traditional practice of servicing and repaying a bank loan, financial leasing provides an enterprise with the opportunity to make lease payments over a much wider range of schemes, taking into account the nature of the leased asset, its term of use, etc. In this regard, financial leasing is the preferred credit tool for the company.
7. Financial leasing is characterized by a more simplified procedure for obtaining a loan in comparison with banking. As evidenced by modern domestic and foreign experience with a leasing agreement, the amount of time spent and the list of financial documents required for submission are significantly lower than when drawing up a long-term financial loan agreement with a bank. To a large extent, this is facilitated by the strictly targeted use of the loan received and its reliable provision with financial leasing.
8. Financial leasing provides a reduction in the cost of credit due to the liquidation value of the leased asset. Since in case of financial leasing, after the end of the leasing period, the corresponding asset is transferred to the lessee’s ownership, after its full amortization, it has the opportunity to realize it at a residual value.