For many organisations, buying assets—in particular, expensive capital equipment—requires a significant investment. Careful planning is needed for the acquisition’s financing. In many cases, it makes more sense for businesses to search for ways to spread the cost of purchasing an asset so that it coincides with the time of the revenue the organisation generates. Asset leasing is the most popular medium-term financing option for investments in capital assets.
Using an asset for a specific length of time in exchange for recurring payments is made possible by financial services such as asset leasing. The finance company purchases the equipment that the business customer specifies for the operation of the business.
What Does Asset Leasing Imply?
It’s important to comprehend what leasing is before going any further. Simply said, a lease is a contract between the lessor (the owner) and the lessee (the user), allowing them to use a building, a car, or any other equipment in exchange for a predetermined number of recurring payments. Anyone, either a person or a business, can be the lessee or the lessor. Consequently, leasing agreements may be made between:
- Individual to Individual
- Individual to Business
- Company to Company
That implies that large corporations, as well as individuals, engage in leasing.
Examples of Asset Leasing
Inventory is one type of asset because it’s something that can’t physically be handled by the person possessing it but can be kept and tracked to provide data. Other types of assets include receivables, which are things a firm receives from a client in exchange for services rendered and which are also liabilities for the organisation that is holding the receivables. Cash, receivables, payables, and capitalised interest on loans are a few examples of assets. Each of these asset categories has a unique classification, and its worth may be determined using a variety of different techniques.
An organisation may sell its assets in a variety of ways. Most organisations will buy them from companies or people who already own them as assets. Other businesses might choose to transfer their assets to another company or liquidate their assets as a way to get rid of them.
Why do Businesses Today Choose to Lease Rather Than Buy?
Businesses today choose to lease rather than buy due to the following reasons:
- Leasing enables businesses to have fewer assets, making it relatively straightforward. Additionally, businesses can now use the capital investment they make to purchase these assets for operational ones.
- A company can utilise its assets to control other financial assets, obtain various forms of financial leverage, and raise additional funds to expand. In the case of a firm, the assets can be sold for less than what it would cost to produce them.
- Individual investors have the option of selling their assets to a third party, who might buy them for less money than they are actually worth. The assets may be leased out to another person, a group, a government, or another territory. These fall under the categories of foreclosure sales, conversion transactions, liquidation sales, and re-allocation transactions.
- Additionally, leasing enables these businesses to hyper-scale or provide services to a constantly expanding consumer base. Leasing helps businesses save a lot of money in the sense that they can use the money they might raise from VC (Venture Capital) to expand the business.
Let’s take an example. So there is a business named X, an Indian website for renting furniture. In essence, X rents out furniture to individuals. Furniture must first be purchased before it can be rented, and there are two common ways to do that: either X can obtain money through venture capital, or they can take out a bank loan.
These are typically not the best solutions since banks frequently deny loans for the purchase of tangible goods like furniture without security and because the money generated through venture capital should ideally be utilized for expanding the firm rather than for the acquisition of assets.
Therefore, leasing physical assets is a perfect alternative for businesses like X that need a lot of assets to run their operations but still want to maintain a low asset load. And surprisingly, these businesses are doing just that. Due to the increase in the leasing of space, a new investment option known as asset leasing has emerged for individual investors. The method of investing in these companies’ leasing agreements is known as asset leasing. In a way, co-investing in assets that are leased to businesses and creating a passive income stream for yourself can help retail investors like you.
Why Should You Think About Investing in Asset Leasing?
Asset leasing is a viable option for investors because of the following:
- The potential for a steady income
Do you know what’s incredible? You can earn it with lease investing and a yield of up to 22% pre-tax Internal Rate of Return (IRR). You have the right to a fixed monthly income under lease agreements.
- A fantastic passive income source
You can earn a monthly income through leasing investment, which is an excellent passive source of income. For your information, you should always determine the return on a fixed monthly income using the IRR.
- Lease financing contracts are supported by solid collateral
You must first comprehend what collateral is, which is an asset that serves as insurance for the lender, such as a house or a car. The lender may take possession of the collateral and recoup his debt if the borrower misses a payment. Your investment in the assets is secured by substantial collateral in lease financing contracts.
You should be aware of how erratic the stock markets are. Look no further than Nifty50. The index was above 12,000 in 2020 when Covid was approaching, but it dropped to 8,000, and now, after just two years, it trades in the area of about 16,000. Do you realize how unstable that is? The stock market is more volatile than this one. As your rewards are not influenced by market factors, leasing investing exposes you to a simpler, more reliable system.
- Portfolio Diversification
Leasing is one type of alternative investment. An excellent instrument for portfolio diversification and risk mitigation is an alternative investment.
Things to Consider Before Leasing Investments
Not everything is always gleaming and glittering. There are some things you should watch out for before investing. Therefore, always use appropriate diligence. Here are some considerations you should make before signing a lease investment deal:
- Assets’ remaining value
An asset’s expected worth at the completion of its salvage value or lease term is known as residual value. It is suggested to estimate the asset’s value using its residual value.
- Deal Tenure
Lease agreements are dependent on tenure and may not offer liquidity for an early exit. The contracts typically endure for years. As a result, it is crucial to consider the duration of the agreement.
- Financial statements and background data for the company
Even while making equity investments, a wise investor would carefully research the company’s history and finances. You should do the same thing while investing in a lease agreement. Consider all its benefits and drawbacks. Next, consider your investment options for leasing contracts.
The working capital and cash flow of a business may be hampered by capital expenditures for outright asset purchases. Asset leasing gives a business the resources it needs to run and expand while preserving its financial flexibility to invest money in other areas. Acquiring assets entirely can be costly, hazardous and prevent a business from growing. Asset leasing offers a practical way for businesses to get the assets they require without incurring disproportionate costs.
For more information related to asset leasing, you can visit the Bhive website.