Leasing - "It is the use of equipment, not the ownership, that generates profit"

Table of contents

1. Introduction

2. History

3. Forms of the leasing
3.1 Operate – Leasing
3.2 Finance – Leasing
3.3 Difference between Operate – Leasing and Finance – Leasing

4. Why Leasing ?
4.1 The Advantages of Leasing
4.2 Leasing in the compares with Loan and Cash
4.3 Disadvantages
4.4 In the tourism industry

5. Summary

6. Index

1. Introduction

“To lease or not to lease – a financing decision”

Companies and experts in special literature often discuss the question whether it is cheaper for a company to buy certain goods on credit or with its own capital. When buying a certain good we moreover have to differentiate between goods that are purchased on lease or bought on credit. This paper does not deal with the fundamental question whether to buy on credit or to lease as it has been proved the advantages and risks of leasing.

The question now is why do companies nevertheless discuss about buying or leasing? Why do companies decide on leasing a wide range of goods from typewriters to cars, trucks and even complete industrial plants? About 11 % of all goods are leased in Germany at the moment. 53 % of which are leasing transactions involving cars. First of all there are considerable differences with regard to the drawing up of a balance sheet. Goods that are bought have to be capitalized with their initial costs while goods that are leased do not have to be shown in the balance sheet of the leaseholder.^[1]

Companies do follow completely different strategies regarding this subject. HENKEL (chemical industry) and RTL (broadcasting company) on the one hand have leased all of their cars explaining that this is the cheapest alternative for them.^[2] Bayer and 3M Deutschland on the other hand use the same explanation but they buy their cars. Car policies are even different between various subsidiaries of one company.

2. History

Leasing, the rental of commodities, is not so sensationally new than it seems like. The main idea, the proprietary-loose use of commodities, is applied in the economic activity already since hundred and millennia year.

Already approximately 350 before Christi determined Aristotle: "The wealth rather consists of the use as in the property", and other authors go even farther back by trying to give the proof that leasing-similar businesses were transacted millennia before Christi, in the second stream valley of the Sumerians.

The year 1877 is the real beginning of the leasing, however, as the “Bell Telephone Company” decided in the USA to rent their telephones instead of selling. Soon, wide companies joined. The United Shoe Machinery Cooperation offered their machines to the shoemakers only equipped with few cash resources to the rent and not to the purchase at. In the twenties of the last century, further companies then followed this example; ”so mainly IBM and the Remington – Rent – Company expelled their punch cards machines, also the United Shoe Machinery expelled their leather processing machines as well as Pitney – Bowes their postage meter (franking machine) on the basis of leasing".^[3] This entire volumes however still remained very low over decades, since leasing was applied only by some few manufacturers, and for those it was normally a sales-political instrument.

The leasing industry got the crucial impulse through the foundation by particular leasing companies, for which leasing was not only a "means of the sale politics" but "business object" at itself. These companies took the rental and funding of the commodities and the risks interconnected with it from the manufacturers. The first kind of leasing company on the world was “the United States Leasing Corporation” in San Francisco/USA established in 1952; on the German market, it was “the German Leasing GmbH” established in 1962 in Düsseldorf, that later amalgamated with the other companies and transferred their seat as “the German Leasing AG” to Homburg.

The illustration 1. shows the development of leasing in the comparison to the entire economic development between 1971 and 2001. The illustration 2. documents this series of numbers optically. How the institute for economy research determined, they added up again acquisition value it from leasing companies in the year 2000, installations rent on over 46 billion € and in 2001 more than 48 billion €.

In the comparison to it the development of leasing in the USA. The following information has been developed from data supplied by the U.S. Department of Commerce, the Equipment Leasing Association of America and the Economics and Statistics Administration Bureau of Economic Analysis. Eighty percent of all U.S. businesses lease all or part of their capital equipment. From 1991 to 2000 assets acquired through leasing have more than doubled (Illustration 3.). The development of the leasing industry is, however, no more evident uncoupled from the entire economic development since end of the eighties so as this was leasing in the establishment phase of the investment and funding alternative. Cause of it is the reached annual leasing volume, that means that the basis effect of a low starting point is discontinued.

illustration not visible in this excerpt

Illustration 1: Entire economic investments ( without housings) and leasing investments in Germany^[4] (Quelle: Institut für Wirtschaftsforschung – Investitionstest, Statistisches Bundesamt)

Total investment in Mio. € Leasing investment in Mio. €

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Illustration 2: Entire economic investments ( without housings) and leasing investments in Germany^[5] (Quelle: Institut für Wirtschaftsforschung – Investitionstest, Statistisches Bundesamt)

^[6] Illustration 3: Assets leased in $ billion in the USA from the 1991 to 2000/www.mediacap.com/geninfo

3. Forms of leasing

In the literature und practice exist different forms of leasing. But there are two main forms where we will look close in the this section. The representation restricts itself to the main features because the borders between the individual forms often are not exact. The most frequent differentiation is the separation of Operate - Leasing and Finance -Leasing.

3.1 Operate – Leasing

Other names are also: operating – lease, operating – leasing and operational lease. The Operate - Leasing is marked through short-term until medium-term leasing contracts, with which the lessee is granted an anytime right to give notice, but under observance of a relatively short period. The lessor carries the risks for the object. Through the short leasing time, the object more frequently changes its lessee and the maintenance costs been taken on from the lessor. Operate – Leasing is often possible to hire an asset, say an item of plan, which is perhaps required only occasionally, rather than purchasing it. Usually the owner carries out any maintenance necessary. The decision whether to buy the asset or to lease it will perhaps be affected by financing considerations. Basically, through, it is an operating decision which would be made according to which approach would be cheaper.

3.2 Finance – Leasing

Finance – Leasing is marked through medium-term until long-term leasing contracts. The contracts are subsumed and normally have a permanent rent time. Since the leasing objects are gotten after the wishes of the lessee of the leasing company, the lessee carries the object-referential risks.

Here the potential user identifies an asset in which it wishes to invest, negotiates price, delivery, etc., and then seeks a supplier of finance to buy it. Having arranged for the asset to be purchased the user leases it from the purchaser. Naturally the lease payments will need to be sufficient to justify the owner´s expenditure, both in terms of capital repayment and of interest.^[7]

[...]

^[1] Prof. Dr. K. D. Däumler,

^[2] Auto Zeitung Nr. 24

^[3] Vgl. Marek, M.

^[4] Vgl. Städtler

^[5] Vgl. Städtler

^[7] McLaney, Business Finance