Financial lease is a universal instrument for quick and profitable enterprise modernization.
Acquisition of equipment with the help of leasing products has several advantages. First of all an enterprise can modernize and enlarge fixed assets without substantial non-recurrent investments. In other words, without diverting assets from current capital and without taking bank loan. As a rule lease payments are paid out from earnings generated by new equipment.
Secondly the Russian Law provides several privileges for leasing, for example, accelerated amortization of lease property. The equipment is amortized three times quicker than the same equipment bought by means of a loan or equity.
For example, if a building crane is amortized within the period of 3-5 years (36-60 months) according to Classification of Capital Assets Included into Amortization Groups, the amortization period decreases to 12-20 months if it is acquired by leasing. During this time the leasing company fully excludes it from the balance and building the company receives in its balance almost new equipment with almost zero price. So property tax is minimized.
Except the opportunity to minimize property tax lessee receives two stipulated by the Law significant tax privileges: lease payments are included into product costs and paid subject to lease agreement VAT should be compensated from budget. However, many companies have problems with VAT refund and they have to receive it in a court case. So taking into account all privileges equipment acquired under lease agreement is often 10-15% cheaper than being bought by credit.
As a rule while concluding lease agreement the following terms are observed: advance is 4-50% from equipment value (amount of advance depends on liquidity of acquired property), tenancy is almost equal to the term of accelerated amortization and is 6-36 months, and leasing company fee is 1-6% from equipment value.
What are the risks for leasing?
Head of St. Petersburg leasing company Dmitry Gorizontov:
“Main risks are connected with equipment sale. The secondary market is not so developed as for example markets of special machines or transport”.
“Advantages and disadvantages depend on kinds of equipment. Liquidity of equipment in the secondary market, delivery terms, level of service, suppliers of equipment and their qualification are very important”, Managing Director of Element Leasing Mr. James Gorham notices.
“The main risk is the risk of the potential liquidity of a leasing item which is as a rule lower than the liquidity of vehicles or real estate units. That’s why it is very important to take a correct view of credit standing of future equipment lessee”, Deputy Chief Executive of Locat Leasing Russia Mr. Dmitry Shabaling says.
“If there are some problems with lessee the leasing company receives all the equipment which may be very difficult to sale at the domestic market. Except liquidity risk of a leasing item there are also standard credit risks connected with probable lessee insolvency”, Viacheslav Andriushkin, Deputy Chief Executive of SDM-BANK, explains.