Rolul Leasing in Finantarea Unei Societati Comerciale HOGMAN_Ioan-Alin (Repaired) (Repaired)

8/19/2019 Rolul Leasing in Finantarea Unei Societati Comerciale HOGMAN_Ioan-Alin (Repaired) (Repaired)

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THE IMPORTANCE OF LEASING IN BUSINESS FINANCING

HOGMAN IOAN-ALIN

Universitatea de Vest din Timisoara, Facultatea de Economie si Administrare a Afacerilor,

Timisoara, Romania

E-mail: alin_hogman@yahoocom

Abstract

Leasing companies are an extremely important component of the national and international financing

system. During the last couple of years, due to the effects of the financial crisis, the romanian leasing

market registered an oscillating evolution. In 2011, however, the market grew with 20 from 2010,

and there has !een noticed an ascending trend. "his article tries to perform an o!#ective analysis onthe !enefits and also on the limitations and risks generated !y leasing operations regarding !usiness

financing.

Key words

financing, leasing, financier, user, credit$

!EL C"as#$$#cat#o%

%21, %2&, %'2$



&' INTRO(UCTION

The concept of leasing was first mentioned in antiquity in the Samaritan town of Ur, around

210 b.c., when agricultural machinery owners started to rent them to farmers, writing these

transactions on clay plates.

The first transactions foreseeing modern leasing took place in the U.S.., towards the end of the 1!th century. "n 1#$$, telephone de%ices were rented to the subscribers and the agreement

was called a & '(S( ).

'easing, as a business technique emerged a a solution to a pressing need to sol%e the funding,

production and consumption issues.

Thus, in 1!*0, +.. -ootle, the owner of a food factory was faced with a problem ne%er

before encountered by him. e recei%ed a %ery profitable food ordering, for which he did not

ha%e the needed equipment or the money to buy them. /ot wanting to lose the customer, he

decided to rent the needed equipment. This decision of renting instead of buying led to the

de%elopment of an entirely new economic branch leasing operations.

Sometimes, due to different reasons, a client cannot obtain a regular loan. (specially smaller

businesses ha%e difficulties in securing the finances for longer periods of time, and thenumber of those willing to pro%ide that type of funding is limited when the financial

institutions tighten the conditions for loan granting. These are the type of situations where the

financial institutions are etremely cautious in ensuring longterm funding.

"f a product offered by the bank cannot fulfill entirely the customers3 needs, new

complementary financial solutions emerge ensuring a new solution for longterm financing

for the customers. Thus, alternati%e sources of funding arise which generally follow the

principles of lending and facilitate international trade. 4ithin the boundaries of these

alternati%e funding sources, such as factoring, franchising, hirepurchase, is leasing, sub5ect of

the article hereby.

)' KNO*LE(GE PHASE IN THE FIEL(

The abundance of economical and political changes in the last decades determined both the

growing importance of the financial loans in economical transactions and the permanent

di%ersification of the banking operations meant for ensuring the most efficient use for loans

corresponding to the needs of the participants of these transactions.

Slowly, the term of 6loaning7, used in trade transactions is being replaced by the term

6financing7, designed to fit multiple lending related acti%ities, without which the use of credit

as the base of economic echanges is no longer possible.

'easing is a %ery original funding technique, which in a broad sense represents a term

financing transaction, practiced by financial companies, legally based on a property rentalagreement.

The speciali8ed literature of the 1!*0s records 9rancis -abione3s article on marketing

opportunities for equipments from different economic branches such as glassware producing,

means of transportation, constructions etc. -abione concludes that the leasing re%enue is

better for the company finances to selling equipment in case of a decreasing in the global

company income.

There are many arguments in fa%or of leasing rather than buying equipment. grawal and

9erguson :2012;, stated that leasing the machinery has a positi%e impact on the en%ironment,

because at the end of the leasing agreement there is a possibility that the same machine will be

leased to another client, not being necessary the production of another equipment of the same

type.



+' LEASING - AN ALTERNATI,E TO BANK LOANING

+'& Co%cet o$ "eas#%. de$#%#t#o%/ ob0ect/ art#es #%1o"1ed/ tye o$ or.a%#2at#o%s/

$eat3res

'easing is a way of rental of machines, equipment, means of transportation, and other goodsin the category of fied assets by financial organi8ations to companies which do not ha%e the

necessary funds to buy them.

fter re%iewing a series of authors and works in terms of leasing, we belie%e that the most

accurate definition of leasing is the one gi%en by <oberto <ou8i =leasing is a medium and

longterm funding operation based on a lease of goods agreement. This is done %ia a financial

intermediate, mediating between the producer of the goods and the user of the goods, buying

from one and putting the goods into ser%ice to the other. The user binds itself to paying the

intermediate, during a determinate number of payments, rent of a greater %alue than the one of

the equipment, which at the end of the agreement may change ownership from the financial

intermediate to the user, initiati%e of the latter71.

+uring the leasing agreement, the goods are the property of the leasing company, which alsocollects the payments agreed upon in the contract. t the end of the agreement, there are three

possibilities regarding the agreement to etend it, to terminate it, or to buy the goods at the

residual %alue :after subtracting the amorti8ation;.

+') T4e 3rose o$ "eas#%.

'easing can be applied for %aried mobile and immobile goods consisting of

1. >obile in%estment goods such as

in the production field equipment and machinery :electronic computing machines, machine

tools, agricultural machinery, %arious de%ices, measuring instrument, means of transportation,

etc.;.

in the field of technical consumer goods for long use.

2. <eal estate goods designed both for companies when renting production or marketing

locations and indi%iduals renting houses.

?. Ser%ices of these, the largest share is represented by the tourism industry.

@f all these goods and ser%ices, sub5ect to leasing, of great importance are the machines and

equipments for production because the payments are a form of rent, at the same time the user

being able to beneficiate from the usage of the goods. The duration of the leasing contract

depends on the optimal duration for goods3 usage.

+'+ Part#es #%1o"1ed #% t4e "eas#%. a.ree5e%t

s mentioned in the definition, leasing is, usually an operation in%ol%ing three parties with

complementary ad%antages, the profit aimed by one of them depends on the economic needs

of the other two parties in%ol%ed

1. The supplier of the goods in his property :seller or manufacturer; is interested in selling the

goods. e signs a contract of sale with the financial intermediate binding him to a series of

characteristic obligations

to deli%er and install the ordered equipment on the date and at the place agreed uponA

guarantee that the deli%ered equipment is consistent with the specifications :therefore

guaranteeing the proper continuation of the user3s economical acti%ity

1 uiu leandruB>anagementul afacerilor intemationaleB, (d. +idactica si edegogica, -ucuresti, 1!!C



2. 9inancial intermediate :buyer; is, usually, a financial company or a bank speciali8ed in

capital in%esting on medium or long term in optimal conditions of ad%antageousness.

?. User :beneficiary; has the interest of using a good without in%esting %ery much in buying

it. This allows him to either redirect his funds elsewhere, or to buy equipment which eceedsin %alue his auto financing possibilities.

+uring the buying of the good, the user acts as a representati%e for the financing intermediate.

The user binds to certain specific obligations arising from the irre%ocable character of the

agreement. e cannot end the agreement under any circumstances. lso the agreement is not

transmissible and the sublease of the good is possible only with the epress agreement of the

financier.

"n conclusion, the user has initiati%e, the seller makes it possible, the financier facilitates it

and all three of them ha%e a common goal an agreement as profitable as it can get.

+'6 C4aracter#st#cs o$ "eas#%.

The main characteristics of the leasing operations are

The dissociation of the proprietary right from the possession rightA

The risk is not targeted on production, but on property of goods, meaning the owner is

con%inced prior to buying the goods that he can lease them for a period of time long enough

not only for co%ering the epenses but to pro%ide a certain returnA

The potential users ha%e the right to choose the equipments and sellers they want. owe%er,

the financier has a strong influence on the other parties in%ol%ed in the leasing operation and

on the goods sub5ect to leaseA

The financier is mainly interested in the user3s acti%ity regarding maintaining, repairing and

ser%ice regarding the equipments, because he too has the interest for a good de%elopment of

the agreement for a satisfactory returnA

+uring the use of the equipments, the user pays rent :leasing payments; which, usually

containing the interestA

The duration of leasing %aries upon the optimal usage duration of the equipments, usually ?

* years, but it can get to up to 101* years, depending on the %alue of the goods and the

reimbursement capacity of the userA

The beneficiary, at the end of the agreement may choose to

a; terminate the agreement and return the goodsA

b; renew the lease periodAc; buy the goods at a price taking into account the amorti8ation, respecti%ely at the residual

%alue correlated with the market price.

"n case of contract termination, the goods are returned to the owner :the financier; and he

must e%aluate the asset regained. Dunescu :200!; debated the fact that in <omania the law

does not regulate the e%aluation of the goods returned in case of cancellation of the leasing

agreement. =ccording to @rder 1? E 200#, paragraph #?, assets are measured when first

recogni8ed, at one of the following %alues

1. cquisition cost in case they were boughtA

2. roduction cost in case they produced E obtained by the companyA



?. 9air %alue if they were obtained for free : as a donation;.7 2

lso, =for the leasing company the asset returned is not a fied asset, because it will not be

used in the production or supply of goods or ser%ices, for rental to others, or for

administrati%e purposes, but probably it will be also used for selling under new financial

leasing contracts :most of the cases;.7?

"n conclusion, =the correct way to classify such assets is as current assets, meaning in%entory,

unless the company has the intention to used it in the production or supply of goods or

ser%ices, for rental to others, or for administrati%e purposes. "n this situation the correct

classification should be as fied asset.7F

'easing is different from the usual renting in that a renting sub5ects goods that keep their

initial characteristics, and the rent payments do not take into account the wear of the

equipment, while leasing sub5ects goods that can become obsolete, reducing their %alue.

Secondly, the payment of an usual rent represents the %alue of right of usage, while theleasing payments represents share of the equipments %alue, highlighting the decrease of its

utility.

lso, the user of the leased equipment, after a while :usually at the end of the leasing

agreement; can become the owner of the leased goods, without being asked to pay the initial

%alue of the goods, paying instead only the residual %alue. This is not the case with renting.

4e can also note a series of similarities between leasing and buying. The resemblance is at the

end of the leasing agreement, the sub5ect being a good that is echanged for money, the

emphasis being on transferring the right of usage in return for money. "n a series of countries,

leasing is considered a form of installment sale.

So, in conclusion, to answer the question =4hy lease, not buyG7, +. Tran made a list of

ad%antages of lease financing such as

reser%es lines of credit conser%ing working capitalA

"mpro%es cash flowA

'eased equipment often pays for itself as it is utili8edA

'easing protects against equipment obsolescenceA

'ease financing applies to most e%ery capital acquisitionA

"nstallation, ser%ice, maintenance, supplies, software and other Bsoft costsB may be included

in lease paymentsA

9leibility uncomplicated addons and upgrades for adapting to shifting business needs.

*

+'7 Leas#%./ a% a"ter%at#1e to ba%8 "oa%s

The de%elopment of leasing operations was boosted by the ad%antages that they offer to the

parties in%ol%ed, including

2 P93%esc3 M'/ Hancellation of a leasing contract I (%aluating the asset reagined, nnals of the Uni%ersity of @radea,

(conomic Science Series, 200!/ p.10!#? P93%esc3 M'/ Hancellation of a leasing contract I (%aluating the asset reagined, nnals of the Uni%ersity of @radea,

(conomic Science Series, 200!/ p.10!!

F P93%esc3 M'/ Hancellation of a leasing contract I (%aluating the asset reagined, nnals of the Uni%ersity of @radea,(conomic Science Series, 200!/ p.1100* Tra% (' (hy lease, not !uy, httpEE(8inerticles.comE$0!2C$0



d%antages for the user

'easing ensures financing up to 100J. t the beginning of the leasing agreement there is no

need for an initial payment with the user3s own funds. So leasing, allows redirecting the user3s

financial funds in other areas of acti%ity. lso, the total cost is lower compared to other

financing optionsA ayment of earnest or monthly payments in ad%ance is not mandatoryA

'ease goods are not highlighted in the user3s financial records until the owner changes. The

leasing payments may be considered user3s epensesA

The constant si8e of the payments facilitates a more rigorous epenses planningA

The duration of the lease can be set so the company can be permanently fitted with the

newest and best yielding equipment for its acti%ityA

The in%estment epenses and re%enues are simultaneousA

Hredit purchasing of high technicality equipmentA

+e%elopment of own production capacityA

Small costs for goods by paying regular rent instead of whole paymentA

Three options at the end of the leasing agreementA Technical and sometimes accounting assistance ensured by the financier.

@ther ad%antages according to >ark Konathon

1. 'easing calls for a monthly payment lower than the periodic payments required when

purchasing new equipment.

2. +own payments are often not required and the cash can be sa%ed for your business

epenses.

?. There is a fied payment plan during the term of the lease unlike the %ariable interest

rates of bank credit lines.

F. 'ease payments are considered preta epenses that reduce ta liability.C

rticle Source httpEE(8inerticles.comEC$C1F1*

d%antages for the financier

@btaining re%enue after leasing monthly rent payments, interest for middle or longterm

financing, costs of ser%ices pro%ided by the financier, risk and etensi%e use payments, etc

Ho%er of all costs through the price of the goodsA

Stimulation of certain economic branches through financingA

'easing is a profitable way for the financier to place its a%ailable fundsA

+ownsi8ing of in%estment risks through keeping ownership of the goods that are gi%en tothe user to eploit.

d%antages for the seller by leasing

The seller promotes its products easier and also increases its re%enueA

<e%enue collecting is usually fast and safe, without any risksA

(panding the geographical area of selling and increasing the opportunity of finding new

clients. 'easing, besides buying with cash, pro%ides the possibility of buying with credit. "n

this case new beneficiaries which do not ha%e the financial means to buy the product ha%e the

opportunity of acquisition. (arning of new clients is also possible because the goods are first

C !o%at4o% M' (hat can e)uipment leasing do for your !usiness*, httpEE(8inerticles.comEC$C1F1*



rented to con%ince the buyer of its efficiency, and if the results are positi%e, he will buy the

equipmentA

9ast access to financing sourcesA

The possibility of obtaining additional income by reselling or releasing the goods that ha%e

been returned after the lease agreement endedA

Transfer of certain risks :indirect leasing; to the new ownerA The sellers financial situation is not affected by debt, despite refinancing, because selling

claims does imply a credit request, but is renting re%enue which is not due yetA

rofit rates are usually higher when leasing instead of traditional selling.

'easing as a form of e%aluation for pri%ati8ation has ad%antages both for the administration,

through temporary proprietary right preser%ation of the companies, being sub5ect to definiti%e

pri%ati8ation once the client has pro%en his managerial skills and the company has a real

chance of progress, and the clients, by gi%ing opportunities to highly skilled managers who do

not ha%e the financial means for such economical transactions.

These leasing operations ha%e a number of disad%antages ob5ectified in certain limits andrisks both for the client and the seller of the goods.

'imits and risks for the user of the goods

The system is %iable only if the good can be eploited throughout the duration of the leasing

agreementA

rior to signing the agreement it3s necessary to take into account the possibility of obtaining

a loan for paying cash that could possibly be more ad%antageous than leasingA

'imits and risks for the seller of the goods

The goods can be damaged by the user through inappropriate usageA

fter the first lease it is possible that the equipment can not be leased to another customer.

The decision of leasing must be taken after studying the possibility of obtaining a bank loan.

>edium and longterm loans are based on the duration criterion. "n terms of the sub5ect of the

loan, we are dealing with in%estment loans and to understand them we ha%e to study the fied

assets of the loan solicitant.

"n order to grant in%estment loans, the bank takes into account the financial structure of the

solicitant because the longer the loan duration is, the longer and more difficult will the bank3s

association with the company."n%estment loans imply studying the auto financing opportunity. The bank analyses the

re%enues of the solicitants, the epenses, profit, with their future e%olutions. "t is also

necessary to take into account the auto financing elements such as amorti8ation, reser%es ant

net profit after taes.

Usually medium and longterm loans are granted taking into account the C0J limit of the total

needed for in%estments, the rest of F0J being the contribution of the solicitor. owe%er in

certain cases, the bank can grant up to #0!0J of the in%estment %alue.

ppro%al or refusal of loan granting is made after analy8ing the meeting of loan conditions.

The banks also take into account the creditworthiness of the solicitor and the precautionary

guaranties. The loan granting documentation is more rigorously prepared, because the bank

and the solicitor are bound for a longer period of time in which many changes can occur bothat the microeconomical and macroeconomical le%els.



9or the solicitor loan granting generates a series of risks and limitations

it does not ensure 100J financing for the in%estments, the solicitor being forced to

contribute with his own fundsA

the goods purchased %ia bank loaning are highlighted in the company3s financial reports asfied assetsA

there is a possibility to not be able to obtain the loan in time :the appro%ing procedure can be

sometimes %ery slow;A

the bank can refuse the loan granting as a result of the uncertainty of loan reimbursement by

the solicitorA

lso there are a series of risks and limitation for the bank which is granting the loan

the loaning risk, also known as debtor insol%ency risk, reimbursement risk, or bank assets

quality deterioration risk, which epresses the probability of not collecting at due date the

re%enues anticipated upon signing the loan agreementA the bankruptcy risk, the assets risk or the debt risk which shows the probability that the

bank3s funds are insufficient to co%er the losses outcome of the current business.

Therefore, companies can, theoretically, finance themsel%es by choosing between the

following auto financing, regular bank loans, leasing, asset selling, or stock sales, the one

which fits best. "n practice howe%er, they do not ha%e the possibility to choose because of

many factors such as the financial situation of the company, etended bureaucracy, lack of

time to fulfill all the conditions set by the financier, etc.

There are other types of leasing agreements, according to bdul Saboor, suitable to a wide range of

businesses such as

a; Hontract hire

Suitable for indi%iduals or business owners who look for new cars once in e%ery ? years. The supplier

pro%ides the %ehicle after the customer makes an upfront payment equi%alent to the F months rental

%alue. Hustomers a car C to 12 months old.

b; 9leilease

erfect fit for business owners who want to change cars e%ery 12 months to 1# months. s part of this

form of contract, the pro%ider would be including the road fund license that would hold good for the

entire duration of the contract. 4hen compared to the other forms of contract, 9leilease pro%ides the

option of terminating the contract within ! months of signing the agreement. "n this form of contract,

the customer requesting for the leasing ser%ice has to make some upfront payment.

c; @n going rolling contracts

This type of contract is ideal for indi%iduals who ha%enLt faced any county court 5udgments :HHK; in

the last C years. This contract is also a%ailable for limited companies who ha%e maintained up to date

accounts with positi%e net worth. "n this contract type, the customer has to make a refundable security

deposit at the beginning of the contract. lso, the customer gets the option of changing %ehicles once

in e%ery si months. Thus there is no need for an agreement with the ser%ice pro%ider on the aspects

related to car maintenance during the leasing period.

d; ire purchase

"deal for when you are looking to lease a speciali8ed or an older car. s a customer, you are eligible to

finance a car that is si years old and has done a mileage of $0.000 miles. The car should ha%e less

than three prior owners. There is an upfront deposit that needs to be paid. This deposit is usually

equi%alent to four month leasing rates. This option has to originate from a reputed dealer and the



funder doesnLt ha%e the rights to finance left hand dri%en cars. "n addition to the upfront fees, there is

an added administration fee charged by the pro%iders offering this type of contract.$

6' CONCLUSIONS

$ Saboor A', Leasing a car has several advantages over !uying one, httpEE(8inerticles.comE$2C!*CC



9rom those presented earlier it is found that leasing is by far the most accessible form of loan, mainly

due to the guarantee of the proprietary right of the financier o%er the gi%en goods.

"f it were to choose a bank loan, the company must pledge a series of goods in its property, which it

may not sell throughout the duration of the loan, while in case of leasing it can sublease the

equipments agreed upon.

Secondly it is far more profitable for a company to purchase the goods by leasing them, because so, it

does not free8e important sums of money, later reco%ering them by selling or leasing the goods.

'easing would partially sol%e the problems generated by the lack of funding which delay the

technological progress, gi%ing the possibility to grow the company3s economic acti%ity, without the

corresponding growth of the financial effort, ensuring the ad%antage of fullser%ice leasing

agreements.

'easing should be used more frequently by the companies dealing with difficulties in fundraising.

lso, solid studies de%eloped by the potential beneficiaries may lead to disco%ering the fact that

leasing is more profitable than buying or importing.

'easing, this modern technique of in%esting and financing, has become an alternati%e preferred by an

increasing number of clients, constituting a part of the financial and managerial -H.

BIBLIOGRAPHY



1) Agrawal V., Ferguson M., Is leasing greener than selling?, Management Science; Mar2012, Vol. 58Issue 3, p523-533;

2) Andreica M., Leasing - cale de finanţare a investiţiilor pentru întreprinderile mici şi mijlocii , Eitura!rimm, "ucure#ti, 1$$%;

3) Bogdan I., Management Financiar , Eitura &ni'ersitar(, "ucure#ti, 2005;) Clocotici ., Operaţiunile de leasing , Eitura *umina *e+, "ucure#ti, 2000;5) Georgescu ! Golosoiu L. Mijloace, modalitţii şi intrumente de plata, Eitura SE, "ucure#ti, 2003;) "onat#on M. !hat can e"uipment leasing do for #our $usiness?, ttp/Einerticles.com%115%) Mate$ ., %onta$ilitatea financiar a întreprinderii între nominali&are şi armoni&are , E. Mirton,

imi#oara, 2002;8) Mate$ ., Pere$ I., Pere$ C., 'a&ele conta$ilitţii , E.Mirton, imi#oara, 2005;$) Mis#%in &.F., (he economics of mone#, $an)ing and financial mar)ets, si*th edition, olum4ia

&ni'ersit, &S, 2001;10) P'unescu M., ancellation o6 a leasing contract 7 E'aluating te asset reagine, nnals o6 te

&ni'ersit o6 raea, Economic Science Series, 200$;11) Puiu A., Managementul afacerilor intemationale, E. 9iactica si :eegogica, "ucuresti, 1$$;12) &a(oor A., Leasing a car has several advantages over $u#ing one , ttp/Einerticles.com%2$513) &itaru .A., +reptul %omerţului Internaţional (ratat , Eitura *umina *e+, "ucure#ti, 200;1) )ita*+icolescu G., egimul juridic al operaţiunilor de leasing , Eitura Eitura ll "ec, "ucure#ti, 2003;15) )ran . !h# lease, not $u#,

ttp/Einerticles.com%0$2%0;

1) )udorac#e . Management <inanciar 7 "ancar, Eitura artea &ni'ersitar(, 200;1%) === *a> no. 28%200;18) === .! no. 28200;1$) === .!. no.511$$%;20) === >>>.aslr.ro;21) === >>>.capital.ro;22) === >>>.maret.ro.

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Rolul Leasing in Finantarea Unei Societati Comerciale HOGMAN_Ioan-Alin (Repaired) (Repaired)

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