Obtaining equipment on lease for the industrial sector with its high purchase checks can look like a very tempting idea. However, despite all the advantages, many company owners are still afraid of leasing like the plague. How to envisage everything and start leasing competently, and why it can have a beneficial effect on dynamics of enterprise development?
Why leasing is needed in industry
Industrial leasing is a form of financing where leasing company acquires the necessary equipment and transfers it to temporary use of an enterprise that is engaged in the production of goods or services.
The company pays lease payments within a certain period, then it can buy out the equipment or return it to the leasing company.
Industrial leasing is a flexible form of financing that allows enterprises to access the necessary equipment without the need to invest large amounts in its purchase. This is especially important for small and medium-sized enterprises that do not have sufficient funds for equipment purchases.
Industrial leasing can be used to purchase various equipment such as machines, industrial systems, transport means and other means of production. In addition, the leasing company may provide additional services such as support and repair of equipment.
Industrial leasing allows businesses to update their equipment, without freezing their capital or overloading their balance sheets. In addition, lease payments can be written off as expenses, which allows to reduce tax burden on the enterprise.
In general, industrial leasing is an effective tool for development of production and updating of equipment, which allows enterprises to reduce their costs and increase production efficiency.
How the leasing process works in the industrial sector
The leasing process in industry involves several steps.
Phase 1.
Identification of required equipment
The customer
determines what equipment he needs for production needs.
Phase 2.
Leasing company search
The client is
looking for a leasing company that specializes in industrial leasing and can
provide it with the necessary equipment.
Phase 3.
Credit assessment
The leasing company
assesses the creditworthiness of the client and accepts decision to issue a
lease.
Phase 4.
Contracting
If the customer has
passed the creditworthiness test, the contract for equipment leasing is signed.
Phase 5.
Equipment delivery
The leasing company
buys the necessary equipment and transfers it to its client.
Phase 6.
Payment of lease payments
The customer pays
lease payments in accordance with the terms of the contract.
Phase 7.
Equipment purchase/return
At the end of the
lease period, the client can buy out the equipment or return it to leasing
company.
Options for leasing implementation in industry
There are several options for leasing in industry:
- Financial leasing. In this case, the leasing company acquires equipment and transfers it for temporary use to the enterprise for a certain term. After the end of the lease period, the enterprise can buy out equipment or return it to the leasing company.
- Operational leasing. In this case, the leasing company not only provides equipment for temporary use, but also deals with its maintenance and repair. The enterprise can change equipment in the course of action of leasing agreement, which allows it to be more flexible and adapt to changing market conditions.
- Sale-and-leaseback. This leasing option is used when the enterprise already has equipment at its disposal, but needs additional funding. The company sells its equipment to a leasing company and immediately rents it back for a certain period.
- Cross-border leasing. This leasing option is used when the leasing company is located outside the country where the ordering company is located. This option can be useful for enterprises that operate in the international market and need funding to purchase equipment in other countries.
Each leasing option has its own features and can be more or less suitable for a particular enterprise, depending on its needs and opportunities.
Advantages of leasing for industrial enterprises
Industrial enterprises can gain a number of benefits from use of leasing:
- Cost savings. Leasing allows the company to access the necessary equipment without the need to invest large amounts in its purchase.
- At the same time, the enterprise can retain its capital for other purposes, such as expansion of production or business development.
- Flexibility. Leasing agreements can be adapted to the needs of specific enterprise, including the duration of the lease period, the size of the leasing payments and equipment buyback terms.
- Upgrading equipment. Leasing allows the company to upgrade its equipment without the need to invest large amounts in its purchase. At the same time the enterprise can use more modern and efficient equipment, which increases productivity and competitiveness.
- Convenience. The leasing company is engaged in acquisition and maintenance of equipment, freeing the enterprise from the need to deal with these questions on its own.
- Tax benefits. Lease payments can be written off as expenses that allows the company to reduce its tax burden.
- Risk limitation. The leasing company may bear certain risks, related to the purchase and maintenance of equipment, which can reduce risks to the enterprise.
- Accelerated process of equipment production. Purchase of equipment can take a considerable amount of time, including finding a supplier, conditions approval, delivery and installation of equipment. Leasing allows you to get equipment faster, since the leasing company may already have the necessary equipment available.
- Improving the balance sheet of the enterprise. Using leasing equipment is not indicated in the assets of the enterprise, which can improve its balance sheet and increase its creditworthiness.
- Increased funding opportunities. Leasing can be beneficial tool for businesses that have limited capacity for obtaining loans or borrowed funds.
- Risk mitigation. The leasing company may bear certain risks associated with the purchase and maintenance of equipment, which can reduce risks for the enterprise.
In general, leasing allows the company to access the necessary equipment without significant financial costs and risks, which can increase its efficiency and competitiveness in the market.
Leasing risks for the industrial sector
Risk 1: High lease payments that could lead to additional financial costs for the enterprise.
Solution: The company should study carefully the conditions of leasing in the contract to ensure that the amount of lease payments does not exceed its financial capabilities. It is also possible to consider the possibility of negotiations with leasing company to reduce the amount of payments, for example, at the expense of increasing the down payment or the lease term.
Risk 2: Need to pay penalties for early termination of the leasing agreement.
Solution: The company should study in advance the terms of the lease agreement and make sure that penalties are not too high. Also you can consider the possibility of including in the contract the option of early termination with the establishment of low fines.
Risk 3: The need to pay for equipment insurance.
Solution: The company should study carefully the conditions of leasing in the contract and make sure that the cost of insurance is included in the leasing payments or does not exceed its financial capacity. You can also consider self-insurance of equipment to reduce additional costs.
Risk 4: Risk of insolvency of a leasing company.
Solution: The company must conduct a thorough analysis of the leasing company and ensure its financial stability and reliability. You can also consider a choice of larger and more well-known leasing companies to reduce the risk of insolvency.
Risk 5: Limitations in the use of equipment.
Solution: The company should study carefully the conditions of leasing in the contract and ensure that the equipment can be used according to its needs. You can also consider the possibility of negotiations with the leasing company to expand the terms and conditions of the equipment use.
Risk 6: The risk of equipment becoming obsolete.
Solution: The enterprise must take into account the possibility of obsolescence of equipment in the process of leasing. Thus, the enterprise must scrutinize the market and technology trends to choose equipment that will be relevant throughout the lease period. You can also consider the possibility of concluding a contract with the option of equipment update during leasing.
Risk 7: Limitations in the selection of equipment suppliers.
Solution: The enterprise must take into account restrictions in the selection of equipment suppliers that can be determined by the leasing company. Thus, the enterprise must study the terms of the lease agreement in advance and ensure that restrictions do not affect its selection capabilities concerning optimal equipment suppliers.
Risk 8: Risk of equipment loss.
Solution: The company should study carefully the conditions of leasing in the contract and ensure that the leasing company is responsible for loss or damage of equipment. You can also consider self-insurance of equipment to protect yourself from financial losses in the event of its loss or damage.
Industrial leasing can be beneficial for businesses that need to purchase equipment, but cannot afford large capital expenditures. Leasing allows the company to use the necessary equipment without the need to buy it. This can reduce financial risks and improve the solvency of the enterprise. In addition, leasing can help the enterprise reducing time to commissioning new equipment and the cost of its maintenance and repair. However, the use of leasing has its own risks, and the enterprise must study carefully the terms of the contract to avoid additional financial costs and problems. In general, industrial leasing can be a useful tool for enterprises, if used correctly and in accordance with their needs.
By Vadim Adamovich, Director of Stylar LLC