Leasing: Financing Business through Leases

Finance lease is an alternative to bank loans, the collateral being the financed asset. This form of financing is used to finance vehicles, equipment, and real estate (less common due to real estate tax).

A finance lease with residual value involves paying instalments, where all annuities but the last are the same. The last, or buyout, instalment is higher than the others (particular attention should be paid to the market value of the leased asset when the last instalment is being paid - its market value should be higher than the last instalment). This kind of financing is often used to finance vehicles to lower the annuity for the client.

An operating lease is typically used to finance vehicles, equipment, and real estate. Basically, it involves assets that are marketable on a secondary market. Leasing companies often require purchase guarantees from suppliers to secure themselves after the lease term has expired.

Operational leasing which includes the associated costs of the leased asset - for example, with a vehicle, the monthly rental includes the cost of registration, full insurance, servicing, replacement tires, etc. This form of leasing is only starting to develop on the Bosnia and Herzegovina leasing market, but in developed markets there are companies that specialize in this kind of leases (ALD Leasing being the best-known in the region). This kind of leasing is used to finance vehicles, particularly passenger cars and small vans.

Financing stock/supplies - a specific type of leasing developed for car dealers. This is an operating lease whereby the leasing company purchases the vehicle from the dealer (the leasing company records the vehicle as stock and does not depreciate the asset). After that, they lease the vehicle to the car dealer, who pays monthly instalments to the leasing company. When the dealer has found a buyer, the leasing company invoices the dealer. This concept was conceived as a way of motivating car dealers to promote leasing as the most favourable form of financing.

‘Sale and leaseback' is a transaction whereby a company sells its own asset to the leasing company and leases it again right away. This kind of financing helps companies improve their liquidity. Such transactions allow a company to change the maturity structure of its debts from short-term to long-term ones on a frequent basis.