What is leasing?

This is how leasing works

With leasing, you have an agreement with a leasing company. The leasing company finances the asset and leases it to you for use or ownership. You pay a monthly amount (lease instalment) to the leasing company for the use of the business asset. Depending on the lease form, you become the owner of the asset directly. Or you determine this at the end of the lease period. Because you pay the value of the asset in instalments, you do not have to make a large investment in one go. This way you keep operating capital in your company.

Types of leasing

The best-known forms of leasing are financial lease and operational lease,

Financial lease

With a financial lease, the leasing company finances the purchase value, or part of it. For example, of a new machine. The leasing company remains the legal owner until the last lease instalment is paid. You pay back the financing in instalments. You are the economic owner of the machine. With this type of lease, the machine is on your balance sheet and you can write it off immediately. For many assets, you are eligible for the investment allowance (investeringsaftrek). Financial lease is a debt on your balance sheet. That can make new funding difficult. You take care of machine maintenance yourself. The economic risk is yours. 

Operational lease

With an operational lease, the lease company remains the legal and economic owner of the asset. It is as if you are renting the object. You record the lease instalments as expenses. You cannot depreciate them or get an investment allowance. The leased object is not on your balance sheet and does not affect your company's financial ratios. However, the lease payments are recognised in the income statement as part of operating expenses. Operating income is reduced by the same amount.

At the end of the lease period, the leasing company takes the object back. Or you take over the object for its current market value or a set price.

Advantages of leasing

Cost

Leasing can be cheaper than a business loan. This applies in particular to equipment with a purchase value of less than €50,000. With a 'customised' lease contract, the monthly costs are usually lower. For example, with a financial lease with an increased final term.

The convenience of leasing

Does something break? Or do you have problems due to wear and tear? In the case of an operational lease, the leasing company is responsible for providing a quick solution. Leasing is also interesting for equipment that you often have to update. You can access new technology more easily and quickly to stay competitive.

Conditions

With leasing, you can take 100% financing. This leaves you with more money for your business. With financial leasing, you may be asked for a down payment or to pay a final instalment at the end of the lease. The duration of a lease contract is tailored to the economic lifetime of the object. For objects with a relatively longer economic life, the leasing company usually agrees to a longer term. Finally, you can use leasing on top of or alongside other sources of financing.

The disadvantages of leasing

Do you want to lease a business asset? Then consider the following disadvantages and other points.

List all costs

Put the cost of leasing and the cost of a business loan side by side and compare them. With a loan, think about the arrangement fee, management fee, administration fee, the repayment you have to pay and, of course, the interest cost.

Lease contract details

The agreements you make are in the lease contract. Many providers give you the option of making a starting balance payment or a final instalment. Be aware that you will then still have to pay part of the financing amount at the end of the term. Also pay attention to the length of the lease period. Does it suit your needs? You do not want to pay for a device for longer than necessary.

Read the lease contract carefully. How does it work if you can no longer meet your obligations? Or if you want to let the contract expire earlier? The terms and conditions state whether and how much compensation you have to pay for a buy-out.

The leasing company

With leasing, you enter into a contract with the leasing company. What does the leasing company have to look out for?

Value of the asset

The leasing company pays attention to the economic risk and the value of the assets you are leasing. Consider what risks are involved in using the assets. Do they retain their value? If so, the leasing company can also use the equipment with another entrepreneur after the lease period. This will affect the lease amount you will pay.

Credit risk

The leasing company looks at the financial situation of your business. Can you meet the obligations throughout the lease term? Can you pay the lease amounts on time each month?

Help with business financing

KVK’s Financing Guide helps you find your way in financing your business. Do you still have questions? Call the helpline on 088 585 11 11 or ask an expert.