This article is part of our series on the financing of investments and retail operation of leasing which is a solution allowing you to finance the acquisition of equipment (leasing of furniture) or real estate for professional use (leasing of real estate).
How does leasing work?
Leasing (or leasing in English) is a financing arrangement based on loans guaranteed by an asset.
In concrete terms, the bank or specialized institution (often a bank subsidiary) will buy for you the equipment or the real estate you want to buy (by financing the acquisition with a loan).
It will then rent you the equipment for a period agreed in advance: generally the depreciable life of the property under a lease of furniture, and over a period of 8 to 15 years in the context of a real estate leasing.
At the end of the lease, you generally have a purchase option that allows you to buy the property for its residual value (ie the resale value of the property once depreciated). We are talking about the option to purchase furniture leases and the promise to sell for the lease of real estate.
In some cases it is also possible to renew the lease with a lower rent given that the loan used to finance the purchase of the property by the leasing company has already been repaid.
What are the advantages of leasing?
The advantages of leasing are multiple.
First of all, leasing generally allows you to finance 100% of the total amount of the property, while a medium-term bank loan usually does not finance more than 70 to 80% of the property HT.
This is explained by the fact that the lender owns the financed asset, and therefore that in case of problems he can very easily get it back and resell it for a refund.
A security deposit and / or a first rent plus may also be requested by the company financing the purchase of equipment. In practice, therefore, this advantage essentially concerns the smoothing of the payment of VAT over the duration of the lease.
Then, the lease is generally quite simple to set up: you can have the financing study done by your bank in advance, and once the purchase order is signed, it will directly settle the supplier or the seller of the property.. So you do not have to advance the funds.
Lastly, leasing is off balance sheet, ie neither the assets rented nor the loans used to finance them appear in your financial statements. The total financial debt of your company therefore seems less important, which would not have been the case if you had financed the investment with a more traditional professional credit.
What are the disadvantages of leasing furniture?
The major disadvantage of mobile leasing is that it generally does not allow the financing of highly specialized equipment.
Indeed, the company that finances the transaction must ensure that there is a secondary market (sale of second-hand goods) allowing it to resell the equipment in the event of default by the tenant or in the event that the tenant decides not to exercise the option to purchase at the end of the lease.
What are the limits of real estate leasing?
Real estate leasing can only be used for the financing of commercial, industrial or office property.
Real estate leasing is only available to companies subject to:
- to the corporate tax
- to the tax on agricultural profits
- to the tax on industrial and commercial profits
- to the tax on non-commercial profits
More information on service-public.fr.
As in the case of mobile leases, real estate leases generally do not allow the financing of buildings whose layout is too specific to be easily resold in the event of default on the loan.
What is the cost of leasing?
The cost of the lease is composed of the following elements:
At the time of setting up the funding:
- Fees: as for any study of a request for financing
- Guaranteed deposit: recoverable at the end of the lease or deductible from the amount of the call option if it is exercised
- 1st rent plus: usually offered as an option – the surcharge plays a role equivalent to a personal contribution for a conventional loan
Over the duration of the rental:
- Rents: payable monthly or quarterly, and subject to VAT
- Insurance: Several types of professional insurance can be offered (machine breakdown insurance, death disability, etc.)
Note : from a tax point of view the use of leasing is neutral for the company: the rents paid to the company financing the operation are deductible expenses, just like the depreciation and interest would have been if you had financed the investment with a bank loan.
What is the difference between mobile leasing and long-term leasing?
The mechanism of the long-term lease is similar to that of the mobile lease: that is to say that a specialized company buys for you an equipment (usually a vehicle), again by financing the purchase by loan, then you rent equipment in exchange for monthly or quarterly rent.
Unlike mobile leases, long-term leases do not have an option to purchase. You must therefore return or rent the equipment at the end of the lease.