Are you looking to finance the new furniture for your offices, or do you want to move your business to a larger location? When we need to face new projects or acquisitions that require an investment, there are several options. What is the most appropriate alternative? Renting and leasing are two of the best ways for freelancers and SMEs looking for a comfortable and functional property financing.
What Are Renting and Leasing?
Renting for goods of fast obsolescence
The renting occurs when a company makes the contract to rent a good with another leasing company. It is usually a furniture type, more specifically cars or computer equipment. Its duration usually exceeds the year, but it is not usually longer than 5. As most rental methods are characterized by charging a fixed fee that is usually monthly.
The landlord takes care of the expenses, reviews, and repairs of the property. The advantage is the possibility of deducting all the expense and VAT by reflecting them in the profit and loss account. That’s why it’s a good option for freelancers.
The duration of the contract must not exceed the useful life of the asset since it will become obsolete in less than 5 years if it is a technological good or a vehicle.
The indemnities should be taken into account in case of breaking the contract.
It is reflected in the Profit and Loss account, as an expense.
Many times, it does not give a purchase option.
As they include all the services, sometimes the quotas of a “renting” are noticeably higher than in other types of financing. Like “leasing,” its main advantage is the tax benefits for companies and freelancers since the monthly installments are fully accounted for as expenses. Individuals do not obtain tax advantages.
Leasing, Rent with Option To Purchase.
At the time of acquiring fixed assets for a company, an important economic investment is required since they are high-cost goods. Therefore, there are alternatives such as leasing. It is a leasing company that gives the lessee company real or personal property in exchange for a periodic rent.
It is ideal for entrepreneurs, startups, and SMEs with little initial capital. This usually consists of the amount of the partial amortization of the asset and the financial costs of the operation.
In general, these are long-term processes that involve a final purchase by the customer.
In this case, the lessor is not a financial entity but a manufacturer or distributor that rents one of their current assets to a company. This will have to face all maintenance and repair costs since there is usually no option to final purchase. The average period of duration is usually in the medium term, between 1 and 3 years.
It is very similar to renting and can be ideal for companies that must have the latest technology in their equipment. It is also very useful in means of transport without worrying about repairs or technical issues.
When considered a rental, administration costs and corporate taxes are reduced. In addition, it does not amortize the residual value.
An example would be a distribution and distribution company, which offers its employees a means of transportation to work. The tenant wants goods, cars or motorcycles, modern and making a purchase his obsolescence will be very fast. Therefore, it will opt for an operating lease with good lease conditions and a future possibility of buying the property.
It deals with the financing of 100% of a good with the right to final purchase. In this case, an entrance fee is not paid, although there are commissions. It is usually used with movable assets (furniture or machinery) or real estate (premises or facilities) a minimum of 2 and 10 years respectively. The purchase option is mandatory, but the lessee may decide not to carry it out if he wishes. The residual value to acquire the property is usually 15% in real estate and a fee in the case of movable property.
It allows a more accelerated amortization than usual. If the client wishes to advance the payments, this point is foreseen in the contract. Therefore, it would obtain a reduction in the quotas and a lower financial cost.
It is accounted for in the asset at a price agreed in the contract and is amortized according to its useful life. The cost of the principal associated with the asset will also be accounted for in the liabilities. As these are fully deductible interests, the amounts paid and interest will be included in the income statement during the year.
Types of Financial Leasing
According to the characteristics of the property, the type of landlord and the procedure that is carried out.
- Direct: the client asks for a good from the leasing company, and it acquires it from one of its suppliers. And finally, the operation of financing the good with your client / company will be carried out.
- Indirect: in this case, the initial relationship is established between the client (future tenant) and the supplier of the asset. Once this operation is established, the client goes to the financial entity in search of financing. Finally, the financial entity will buy the property and then rent it to the client.
- Lease-back or retro leasing: it is a two-part leasing operation. The owner of property contacts a leasing entity and agrees to sell a property. Then a financial leasing contract is signed to recover the ownership of this property.
Main Differences Between Both:
About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual bookkeeping, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file, critical financial documents and back office tools in an efficient and secure environment. Complete Controller’s team of US based accounting professionals are certified QuickBooks™️ ProAdvisor’s providing bookkeeping, record storage, performance reporting and controller services including training, cash-flow management, budgeting and forecasting, process and controls advisement, and bill-pay services. With flat rate service plans, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.