Financing during the Covid-19-Pandemic. Is Leasing an Alternative Option for IT Equipment?

Bachelor Thesis, 2021

128 Pages


Table of Contents

List of figures

List of tables

List of Abbreviations

1 Introduction

2 Fundamentals of Leasing
2.1 Basics and Terms
2.2 Subsectors of Leasing
2.2.1 Leasing object
2.2.2 Leasing Contract
2.2.3 Contractual Partner
2.3 Leasing effects
2.3.1 Effects of leasing on liquidity
2.3.2 Balance sheet effects
2.3.3 Tax effects
2.4 Alternative financing options and comparison to leasing
2.4.1 Financing basics
2.4.2 Internal Financing
2.4.3 External Financing
2.4.4 Leasing compared to other financing options

3 Changed economic situation during the Corona pandemic
3.1 Coronavirus an introduction
3.2 Impact on the German economy
3.3 Measures taken by companies
3.4 Impact on the leasing industry

4 Empirical approach
4.1 Data Evaluation
4.2 Results of the survey

5 Conclusion and Outlook

List of Annexes

Reference List

List of Figures

Figure 1: Decision for leasing

Figure 2: Procedure of indirect leasing

Figure 3: Overview of financing types

Figure 4: Internal financing

Figure 5: Fixed loan

Figure 6: Repayment loan

Figure 7: Annuity loan

Figure 8: GDP Development

Figure 9: Undertaken measures

List of Tables

Table 1: Differences between equity and debt financing according to the legal status of the investor

Table 2: Hidden reserves in the balance sheet

Table 3: Criteria for the classification of credit financing

Table 4: Overview of short and mid-term loan financing

Table 5: Comparison of repayment loan and leasing

Table 6: Repayment loan

Table 7: Leasing

List of Abbreviations

Abbildung in dieser Leseprobe nicht enthalten

1 Introduction

The Corona pandemic, which broke out in 2020, has endangered not only the health of many people but also the economic stability in Germany; many companies have become economically unstable as a result of the pandemic, as shown by the 4.8% drop in gross domestic product (GDP) in Germany (Statista, 2021). As a result, the federal government called for an economic shutdown to protect the population from the increasing number of Corona infections (Knauth and Krafczyk, 2020: 677).

The result was a massive drop in sales in many sectors like aviation and tourism. In addi­tion, the German government's Corona Occupational Health and Safety Ordinance stipu­lates that employers are obliged to offer home offices, provided there are no operational reasons to the contrary (Presse- und Informationsamt der Bundesregierung, 2021). There­fore, the necessary IT equipment for the employees was usually unavailable and had to be procured. This is in direct contrast to the lack of liquidity of the companies due to the multiple slumps in sales. This resulted in resorting to alternative financing options, such as leasing.

Leasing originated in the USA and has developed from a sales promotion tool for manu­facturers and dealers to a natural form of financing for the respective buyer. The first German leasing company was founded in 1962. Initially, leasing as a form of funding was difficult to establish and developed in two different directions: direct leasing with an in­dependent leasing company as a contact and sales leasing, in which the dealer also takes on the role of the leasing company as an intermediary (Pahlke, 2013: 1).

The purpose of this paper is to introduce leaser leasing as a financing alternative for IT equipment during the Corona pandemic and to provide an answer to the following re­search question:

Did leasing gain relevance as a financing alternative during the Corona pandemic, and was it the appropriate type of financing for the companies ?

To answer this question, an overall picture of the IT equipment leasing industry during the Corona pandemic is developed with the help of the literature and expert interviews. To this end, the reader should first be given a comprehensive picture of the financing alternative of leasing. Chapter 2 first presents the basics of leasing and the various sub­sections of leasing. It then continues with the three main effects of leasing and their mode of operation and concludes by comparing leasing with other financing alternatives, pre­sented comprehensively in advance. Chapter 3 serves to inform the leaser about Germa­ny's changed economic situation and describes the measures taken by the companies. Chapter 4 presents the information obtained from the expert interviews that were con­ducted.

Finally, Chapter 5 concludes the thesis on whether leasing is suitable for financing IT equipment.

2 Fundamentals of Leasing

The following chapter offers a basic understanding of leasing as a financing option and differentiates it from other types of financing.

2.1 Basics and Terms

The term leasing is understood to mean renting fixed assets by financing institutions and other companies that conduct rental business on a commercial basis. Leasing is usually equated with finance leasing, which is a unique form of debt financing. Based on a gen­erally non-terminable contract between a company (lessee) and a leasing company (les­sor), leasing serves to procure capital goods. The lessor acquires the asset and makes it available to the lessee for a contractually agreed period. At the end of the primary lease period, the lessee must return the leased assets or exercise certain option rights. The lessee can exercise certain rights agreed to at the beginning of the contract at the end of the contract period. The lessee is often granted a purchase option. The contract term is gen­erally between 40% and 90% of the average useful life for tax law reasons. The leasing company is regularly the economic owner of the leasing objects, and in all cases, the legal owner also accounts for them (Gebele and Kroll, 1992: 14).

During the useful life of the asset, the lessee has to pay lease payments to the lessor, in addition to other services; these consist of repayment portions to cover the investment sum, a refinancing portion, and a portion to cover profit, incidental costs, and risk (Gebele, Dannenberg and Kroll, 1998: 2).

Leasing has become increasingly important over the years, and the following chart shows the answers given by German companies in 2019 to the following question (BDL, 2020: 7):

To what extent was the financing form "leasing" considered in investment decisions?

Figure 1 Decision for leasing

Abbildung in dieser Leseprobe nicht enthalten

Always «Frequently «Sporadic «Never

Source: Own presentation based on BDL, Marktstudie - Leasing in Deutschland 2020: 7

2.2 Subsectors of Leasing

The following chapter presents the various subsectors of leasing.

2.2.1 Leasing Object

The leasing object can be consumer goods with longer service life, such as office equip­ment and machinery, as capital goods of any kind (Grundmann, 2019: 4). Consumer goods leasing is also referred to as private leasing because it is mainly used by consumers (Kratzer and Kreutzmeier, 2002: 30).

An example of capital goods leasing is cost-intensive medical equipment in hospitals and doctors' practices. Rapid technological advancements mean that medical equipment is often outdated long before its 7- to 10-year depreciation period. Traditional acquisition methods of the buyer are not economical against this background. As a result, the leasing volume for medical equipment is increasing by 6.5% per year, which means that it is growing at a higher rate than the medical technology market as a whole (Grundmann, 2019: 4).

In leasing, a distinction can also be made between individual and universal goods. Uni­versal interests can change the lessee during the leasing period as they do not require unique production. On the other hand, personal goods are designed very specifically in terms of their type of manufacture and intended use according to the lessee's ideas, mak­ing it difficult and relatively rare to change the lessee. Individual leasing according to the wishes of the lessee is also called special leasing (Wöhe and Döring, 2008: 615).

2.2.2 Leasing Contract

Generally speaking, leasing contracts are classified into two forms: operating leasing con­tracts and financing contracts. The difference between them in international accounting goes hand in hand with the balance sheet classification of the leasing object. If the contract is classified as a finance lease, the lessee must recognize the leased asset in the balance sheet; if it is an operating lease, it must be recognized in the lessor's balance sheet (Sabel, 2006: 55).

Operating leasing

The operating lease term covers only part of the useful life of the leased asset, which is similar to the active life. The lease term is usually short or indefinite with either a simpli­fied termination option or termination at any time. The difference between an operating lease and a rental is, therefore, hardly noticeable. Thus, the financing interest for a com­pany is less in the foreground than a sales interest in the case of direct manufacturer leas­ing (Grundmann, 2019: 8).

If the lessee decides to terminate the contract only after a short period, the leasing install­ments already paid cannot cover the lessor's acquisition and financing costs. Due to this fact (Wöhe and Döring, 2010: 615), only universal goods that can function as a means of payment and are accepted as an equivalent value for goods are considered for operating leasing (Kampmann and Walter, 2008: 30), as the lessor must take care of a follow-up rental or alternative use for the leased good (Wöhe and Döring, 2010: 615).

Financial leasing

Finance leasing is not pure financing but a combination of investment with a correspond­ing financing measure. Instead of the transfer of capital to purchase the investment object, the investment object itself is the investment object itself (Reichling, Beinert and Henne, 2005: 205). A characteristic feature of the finance lease is a fixed essential lease term. During this period, the finance lease cannot be terminated. The actual leasing period amounts to approximately 50% to 75% of the useful life of a leased asset (Wöhe and Döring, 2010: 617).

Non-payout leasing applies when the lessee only partially covers the lessor's total invest­ment costs with installments paid during the minimum or introductory lease period. The part that has not yet been amortized is covered in various ways in individual contract types (Kresse and Leuz, 2013: 114). On the one hand, in the case of contracts with a right of tender, the lessee is obliged, upon request, if no renewal contract is concluded, to pur­chase the property at a price agreed upon at the time of conclusion of the contract, (Grund­mann and Rathner, 2011: 136), on the other hand, through contracts with the right of termination by the lessor (Kresse and Leuz, 2013: 114).

Full pay-out leasing is a part of finance leasing. The lessor demands and keeps tax benefits associated with equipment ownership, which accelerates tax depressions (Nevitt, Fabozzi and Mathew, 2000: 164). Full pay-out leasing is also assumed if the lessee covers at least the total investment costs of the lessor with payments made during the necessary leasing period. These include acquisition and ancillary fees, including the lessor's financing costs and a possible profit margin. In general, a distinction is made between contracts without an option, contracts with a purchase option on the part of the lessee after the primary lease term, contracts with a lease extension option on the part of the lessee after the direct lease term, and special leases (Kresse and Leuz, 2013: 114).

One of these particular forms is the sale-and-lease-back, which is subordinate to finance leasing and in which the leased asset is already in possession of the future lessee. The lessee sells the leased asset to a leasing company and then leases it back again. Therefore, the sale-and-lease-back contract consists of two separate contracts: a purchase contract and a leasing contract. Furthermore, tax and balance sheet motives are usually the main focus (Siebert, 2009: 19).

2.2.3 Contractual Partner

Systematization can be carried out according to the number and relationship of the con­tractual partners involved. However, a distinction must be made between direct, indirect, and manufacturer leasing (Gabele and Kroll, 2001: 6).

In traditional indirect leasing, a typical triangular relationship exists between the lessor, lessee, and manufacturer. First, the lessor concludes a purchase contract with the manu­facturer for the leased object and pays the purchase price. Second, the item is delivered to the lessee and used by the latter. Finally, the transfer of the object is reimbursed by the leasing installments to be paid to the lessor. Thus, in indirect leasing, the primary business interest of the leasing company is the processing of the financing transaction (Gabele and Kroll, 2001: 6). The relationship between the three relevant parties in indirect leasing is shown in the following diagram.

Figure 2: Procedure of indirect leasing

Abbildung in dieser Leseprobe nicht enthalten

Source: Own presentation based on Gabele/Kroll, Leasingverträge 2001: 6

In the case of direct leasing, the manufacturer or supplier itself acts as lessor; the manu­facturer's chance with direct leasing is to achieve sales promotion. The advantage for the lessee is that all services, such as purchase, financing, delivery, warranty, and mainte­nance, can be accessed without having to look for additional contractual partners. In the case of direct leasing, it is possible in some cases that the manufacturer does not offer the lessee any option rights such as a purchase or lease extension, the reason being that the lessor aims to conclude a new leasing transaction at the end of the lease term (Gabele and Kroll, 2001: 7).

2.3 Leasing Effects

The following section outlines the reasons that lead the lessee to conclude a leasing con­tract. These reasons can be divided into three sub-areas: the liquidity effect, the effects of leasing on the balance sheet and tax effects.

2.3.1 Effects of Leasing on Liquidity

Every investment requires financial resources to pay the purchase invoice, which must be taken from the available liquidity and, therefore, worsens the liquidity status (Kratzer and Kreutzmair, 1997: 100). For this reason, leasing is an attractive alternative, as it does not require the use of own funds, thereby maintaining liquidity. Lease agreements invoke a fixed term with monthly prepayments on an annuity basis. This payment run is consistent with the straight-line depreciation period and, thus, has a gentle impact on the lessee's liquidity (Kratzer and Kreutzmair, 1997: 101). The amount of current lease payments can, therefore, be adjusted to the lessee's liquidity requirements by stretching the term of the contract by the decree, making an appropriate particular payment, and increasing the re­sidual value in line with the market value (Kratzer and Kreutzmair, 1997: 102).

In case of leasing, the lessee only has to amortize the actual depreciation of the leased asset. In contrast, in debt financing, the total loan amount has to be repaid in the amount of acquisition costs. In addition, the own funds saved by leasing can be used more prof­itably in other company areas, such as advertising, current assets for research purposes, or inventory financing (Gabele and Kroll, 1992: 155).

Another liquidation effect for the lessee is the passing on of purchasing discounts that large leasing companies receive from dealers. Although the law on deals prevents the free passing of purchase discounts to private customers, the leasing company can pass on these discounts to the lessee in the form of reduced leasing rates. This gives the lessee consid­erable cost advantages (Kratzer and Kreutzmair, 1997: 102).

2.3.2 Balance Sheet Effects

Compared to other forms of financing, the advantage of leasing is that it does not affect the lessee's balance sheet. If assets are not acquired as property but only used under a leasing agreement, the leased asset does not increase the lessee's assets. There are no changes either in fixed assets on the assets' side of the balance sheet or as borrowed cap­ital on the liabilities' side so that the balance sheet total does not change either. The lease payments are charged in full as operating expenses in the income statement (Bender, 2007: 27)

This balance sheet neutrality offers the possibility of expanding the debt framework or keeping credit lines free, which is of high importance to companies. There are several reasons for this. On the one hand, balance sheet neutrality does not affect the associated balance sheet ratios and expands the future financing framework for lenders with ratio- oriented credit ratings. On the other hand, leasing companies are risk specialists who have specialist knowledge of the product and the market when it comes to realizing the asset and, therefore, and accept lower credit ratings (Kroll, 1992: 152). The thesis that the re­sulting balance sheet structure effects result in an advantage for leasing is invalidated because there is an extensive reporting obligation for leasing contracts in the notes to annual financial statements (Kroll, 1992: 153). In addition, lessees must regularly disclose their lease liabilities in credit negotiations. External analysts will generally take them into account in their valuation (Mellwig, 1983: 2261).

Another argument in favor of leasing within the balance sheet structure is that leasing expands the scope of debt since leasing companies require less collateral than banks, for example, because they are the owner under civil law. This is particularly true in conjunc­tion with the right of segregation in the event of bankruptcy on the part of the lessee, as well as better opportunities for realizing the asset (Kroll, 1992: 153). Furthermore, the thesis is that a more significant number of financing partners can extend the debt frame­work (e.g., through competent contact with a leasing company). In addition, this results in greater relative independence from individual financing partners, which is particularly relevant for newly established companies (Kroll, 1992: 154). Finally, lease financing may have advantages for corporations about possible over-indebtedness, which may lead to bankruptcy. Due to the improved balance sheet ratio, any over-indebtedness of the com­pany in a crisis is unlikely to occur as quickly as in the case of loan financing, for example (Kroll, 1992: 154).

2.3.3 Tax Effects

The tax implications have a significant influence on the decision to choose leasing as a financing alternative. The prerequisite is that the leasing company is in a situation, such as the profit zone, in which the company incurs tax burdens such as income tax (Kroll, 1992: 154). Lease payments are classified as operating expenses and are, therefore, im­mediately fully deductible for tax purposes. However, in the case of equity financing, only due depreciation has a tax-reducing effect (Haasis, Fischer and Simmert, 2007: 359). A significant difference between leasing and other financing options is the attribution of the asset to the lessor's help and the classification of the lease contract as a pending trans­action (Kratzer and Kreutzmair 1997: 106), which has further consequences for the lessee, mainly explicitly intended with the help of the leasing transaction, for the accounting of the leasing transaction. A pending transaction is a mutual contract for the exchange of goods or services. The party obligated to provide the goods or services has not fulfilled its principal obligation (Beigler, 2011: 48).

Sales tax

The lessor's transfer of use constitutes another lease within the meaning of the German Value Added Tax Act. The basis for taxation is the lessor's registered office in Germany. All contractually agreed payments, special payments, lease installments, advance pay­ments, advance rentals, option prices, or compensation payments in the event of prema­ture termination of the contract are subject to VAT. The lessee can deduct input tax if the relevant conditions under Section 15 of the German Turnover Tax Act (UStG) are met (Kratzer and Kreutzmair, 1997: 115). Compensation payments that constitute damages are also not subject to VAT. This applies, for example, to future lease payments that be­come due prematurely in the event of extraordinary termination of the contract by the lessor. If the asset is purchased, the VAT due must be temporarily financed until the input tax refund(Kratzer and Kreutzmair, 1997: 116).

Property tax

Different attribution can only result in property tax effects due to the additional valuation (Koch, 1981 33). Therefore, leasing does not affect the lessee's property tax position. Similarly, for the lessee, the tax base for calculating property tax remains unchanged (Kratzer and Kreutzmair, 1997: 114).

2.4 Alternative Financing Options and Comparison to Leasing

The remainder of this paper presents the alternative financing options to leasing. This subsection concludes with a direct comparison of leasing with selected financing options.

2.4.1 Financing Basics

In principle, all organizations have a wide range of financing instruments at their disposal, but not all are equally suitable for all financing issues. The current situation of the com­pany plays an important role. In general, financing is based on two pillars. In capital for­mation, part of the profit is not distributed to the owners and is instead available for the pursuit of specific goals. On the other hand, there is the possibility of external and internal financing, which have received their name through the origin of capital. While internal financing comprises those types of funding in which financial resources are generated internally, external financing includes those forms of financing in which the money is provided externally. The advantages and disadvantages of the types of funding and the possibility of using them in a specific case depend on numerous influences. Therefore, they must be assessed in each case (Nicolini, 2006: 55). The following table shows equity and debt financing broke down into external and internal financing.

Figure 3 Overview of financing types

Abbildung in dieser Leseprobe nicht enthalten

Source: Own presentation based on Schmolke and Deitermann, Finanzierungsarten 2021

As shown in the financing matrix, a distinction is made between the types of financing according to the investor's legal status (Self- and debt financing). This also results in the differentiation of these two types of funding according to liability or non-liability (Nathu- sius, 2001: 18). The following table presents the differences between self- and debt-fi­nancing according to the legal status of the investor.

Table 1 Differences between equity and debt financing according to the legal status of the investor

Abbildung in dieser Leseprobe nicht enthalten

Source: Own presentation based on Wolf,Hill and Pfaue, Struktorierte Finanzierung 2011: 4

2.4.2 Internal Financing

Like external financing, internal financing serves to raise liquid funds. However, the im­portance of internal financing is often underestimated, as self-depreciation and provision financing alone account for a large part of the financing volume of German companies. Internal financing provides liquid funds derived from the internal processes of the com­pany. Elementary processes in this context are the usual sales and asset restructuring pro­cesses that lead to capital releases outside the usual sales processes. The prerequisite for internal financing is that no cash expenses are incurred in the same period. Accordingly, internal financing is composed of sales processes that lead to surplus financing as well as capital release processes that enable reallocation financing (Becker, 2015: 245). The types of internal financing with their respective financing options are shown in the following figure.

Figure 4 Internal Financing

Abbildung in dieser Leseprobe nicht enthalten

Source: Own presentation based on Becker, Innenfinanzierung 2015: 245


Self-financing is when parts of the profit generated are not distributed to owners but are retained in the company. These profits are then particularly available for investment (Nic- olini, 2006: 56). According to a survey conducted by KfW in 2005, this retention of earn­ings is the preferred method of corporate financing. According to this survey, almost 80% of companies want to make an investment by retaining profits (Nicolini, 2006: 57). The advantages of self-financing are manyfold: on the one hand, self-financing does not create dependency on potential creditors, and on the other hand, it strengthens the equity base, thereby improving creditworthiness. In the case of self-financing, neither interest nor re­demption payments are incurred, which positively affects liquidity (Nicolini, 2006: 58). A distinction can be made between open and silent self-financing (Becker, 2015: 246).

In the case of open self-financing, parts of the profit reported in the annual financial state­ments are not distributed to the equity providers or are distributed only in part. This re­mains in the company and can be used for investments, for example. The accumulated profits are taxed in the company and strengthen the company's equity position; thus, they increase the capital position in the balance sheet. In this form of financing, a distinction is made between partnerships, sole proprietorships, and corporations. In the case of part­nerships and sole proprietorships, undistributed profits flow into the variable equity ac­count of the company. After deduction of income tax, the remaining profit is credited to the equity account (Prätsch, Schikorra and Ludwig 2012, 174).


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Financing during the Covid-19-Pandemic. Is Leasing an Alternative Option for IT Equipment?
University of applied sciences, Düsseldorf
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financing, covid-19-pandemic, leasing, alternative, option, equipment
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Deniz Ay (Author), 2021, Financing during the Covid-19-Pandemic. Is Leasing an Alternative Option for IT Equipment?, Munich, GRIN Verlag,


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