Leasing as an alternative to credit-financed purchase?

Table of contents

1. Introduction
1.1 Problem statement
1.2 Objective
1.3 Methodological approach

2. Theoretical foundations
2.1 Definition of leasing
2.2 Definition of credit financing
2.3 Differences between leasing and rent

3. Variants of leasing
3.1 Operate Leasing
3.2 finance lease
3.3 Leasing of movables
3.4 Real estate leasing
3.5 Full amortization lease
3.6 Partial amortization leasing
3.7 Direct leasing
3.8 Indirect leasing
3.9 Sale-and-lease-back leasing

4. Comparison leasing – credit financing
4.1 Tax aspects
4.2 Accounting aspects
4.3 Business aspects
4.4 Case study

Bibliography

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1. Introduction

1.1 Problem statement

Nowadays, both companies and private households have various possibilities to finance a purchase. Due to the rapid technical progress, companies in particular are under pressure to keep up with the times and to keep their technical equipment as up-to-date as possible in everyday operation in order to remain competitive. Making a decision on which type of financing to choose is often difficult, as some aspects conflict with each other (Pape, 2009, p. 14ff.). Since one's own financial resources are often limited, alternatives to debt financing are becoming increasingly attractive.

1.2 Objective

The aim of this term paper is to make a comparison between classic credit financing and leasing. Here, the question is considered whether leasing can be an attractive alternative to classic credit financing. Subsequently, credit financing and leasing are compared taking into account tax, accounting and business aspects. Subsequently, the previous findings are illustrated by means of a case study with regard to the decision between credit financing or leasing a Mercedes-AMG A45. Finally, a conclusion is drawn on the initially mentioned question.

1.3 Methodological approach

At the beginning of this term paper, the terms leasing and loan financing are defined. Subsequently, the differences between leasing and rent are shown. The core of this elaboration deals with the two basic forms of leasing, operate leasing and finance leasing, as well as other leasing variants which are categorized according to different criteria.

2. Theoretical foundations

2.1 Definition of leasing

The term leasing generally describes a right of permanent use of an investment or consumer good, but in which there is a clear difference to the characteristics of a conventional rental or lease agreement. The word leasing comes from the English language and means translated "rent" or "lease" (Feinen, 2012, p. 1f.). There are various different forms of leasing, which makes it clear how differently a leasing contract can be designed. In a leasing contract, an asset is provided to the lessee by a lessor for a certain period of time. The two contracting parties conclude a leasing contract in which the useful life, the amount of the monthly leasing installment and the leased object are agreed. The lessee therefore does not have to spend any acquisition costs on the leased asset, but only has to pay a monthly rent for the use of the leased object. (Jung, 2010, p. 774). A distinction is made between movable property leasing and real estate leasing, which refers to the mobility of the leased object (Goeke, 2008, p. 145). Leasing consists of components of the loan, the rent and the classic purchase transaction and is a special form of debt financing (Beigler, 2011, p. 15f). Depending on which variant of the leasing contract has been concluded, after the expiry of the contractually agreed rental period, the lessee has various options to decide what happens to the leased object. For example, it is possible to purchase the leased object or return it to the lessor. Also an extension of the Leasing period for the further use of the object is a possible alternative (Siebert, 2001, p. 17f.). The monthly leasing instalment to be paid is determined on the basis of the amount of the purchase price of the leased asset, the risk of the lessor and the coverage of the lessor's costs as well as the interest on the capital employed (Siebert, 2001, p. 18). Consequential costs arising from the use shall be borne by the lessee. This includes costs such as maintenance and servicing costs (Bordewin, Tonner, 2003, p. 1f.).

Abbildung in dieser Leseprobe nicht enthalten

Figure Own presentation "Basic structure of leasing"

Source: Own presentation based on Jung (2010): P. 32

2.2 Definition of credit financing

The term credit comes from the Latin language and can be traced back to the root of the word "credere", which is translated as "trust" or "believe" (Schäfer, 1998, p. 187). In finance, the word credit is understood to mean that a person or a company is willing and able to fulfill a promised payment commitment contractually correct. In this context, the term credit is understood as creditworthiness. A loan financing ends with the full and punctual payment of the loan amount and the accrued interest to the lender (Schäfer, 1998, p. 188). Credit financing is a classic type of external and debt financing. Here, the lender provides the borrower with a fixed amount of debt capital for his company (Becker, 2013, p. 183). The borrower is provided with financial resources, whereby the lender acquires creditor rights (Pape, 2009, p. 131f.). In the case of loan financing, the borrower undertakes to fulfill the interest and principal payments until the end of the term. The amount of interest to be paid is linked to a number of factors. Essential criteria are the capital market situation, the term of the loan, existing collateral of the borrower and his creditworthiness (Wöhe, 2008, p. 595f.).

2.3 Differences between leasing and rent

Based on the definition of leasing already described, it becomes clear that there are many similarities between leasing and rent. Despite the many overlaps, however, there are also some serious differences. Leasing focuses on financing. The question that is answered in this approach to financing is whether the asset should be purchased from own resources, credit funds or with the help of leasing. Whereas rent, an investment approach, is mainly the question of whether an asset should be bought or rented is dealt with (Kuhnle, 2005, p. 21f.). Furthermore, the selection of the good to be obtained is differentiated. In the case of a leasing contract, the lessee can usually configure his goods himself, whereby in the case of a rental contract, however, an already existing object is rented. Accordingly, in this context, the landlord has the option of deciding to which party the property to be rented out is rented. He is responsible for the decision-making power. This is different with a leasing contract. Both the manufacturer and the quality of the product to be tested are determined individually by the lessee through the independent selection. Following the useful life of the leased object specified in the contract, the lessee has various option rights to decide what happens to the leased object. Options include the purchase of the leased object or the extension of the useful life through another leasing contract, which are usually regulated in advance of the conclusion of the leasing contract (Siebert, 2001, p. 17f.). In contrast, such options are not part of a lease. In the case of leasing, the lessee bears the liability risk, whereas in the case of a lease, the landlord bears the liability risk in the event of damage (Kuhnle, 2005, p. 22). Due to the contractually stipulated useful life in leasing, there is also a high level of planning security for the lessor.

3. Variants of leasing

Different variants of leasing must be distinguished. The variants of leasing shown below can be entered into different categories according to contract term and terminability, type of leased object, Leasing contract models, position of the lessor and in various special forms (Kuhnle, 2005, p. 29). The forms of leasing to be classified are operating leasing, finance leasing, full amortization leasing, partial amortization leasing, direct leasing, indirect leasing as well as movables and real estate leasing. A special form of leasing is sale-and-lease-back leasing. In principle, all types of assets are suitable for leasing.

Abbildung in dieser Leseprobe nicht enthalten

Figure Own presentation "Classification of leasing types"

Source: Own presentation based on Kuhnle (2005): P. 32

3.1 Operate Leasing

Operate leasing is one of the two basic forms of leasing and must be considered from the point of view of contract duration and terminability. This form of leasing is often compared to a conventional lease. The rental objects in Operate Leasing are mostly leased items that have to be replaced regularly due to technical progress. Operate leasing is particularly suitable for companies that also have a fluctuating demand for the required work equipment due to seasonal fluctuations, as well as for companies that need certain work equipment in the short term exclusively for a specific project (Kuhnle, 2005, p. 30f.). one The main characteristic of Operate Leasing is the short to medium term of the contracts, as well as the right of termination on both sides. This variant of leasing can be terminated at any time, subject to compliance with the contractually stipulated deadlines. The focus of this form of leasing is the usage function of a leased object and less the Financing function (Becker, 2013, p. 218). The investment risk as well as the costs for the maintenance, servicing and repair of the leased object is borne by the lessor (Kroll, 2008, p. 18). Typical for Operate Leasing are the changing lessees. The lessor's leased object is leased several times to different lessees so that the acquisition costs are completely refinanced. Due to the flexible termination option, there is no planning security for the lessor, which makes it clear that in the case of Operate Leasing, a single leasing contract is not sufficient for the complete amortization of the leased asset. (Kroll, 2008, p. 20). The lessor acts as an investor in Operate Leasing, which is why Operate Leasing is understood as an investment approach (Goeke, 2008, p. 147).

3.2 finance lease

The second basic form of leasing is finance leasing, which deals with the question of how a future investment should be financed. This type of leasing is the most widely used type of leasing. Leasings (Kroll, 2008, p. 19). Like operate leasing, this approach is to be classified according to the term of the contract and the terminability. In contrast to operate leasing, finance leasing is a financing approach. Financial leasing is in direct competition with traditional credit financing. In addition, as with operate leasing, this is a special form of external financing (Goeke, 2008, p. 147). In contrast to operate leasing, finance leasing differs, among other things, in the medium to long-term contract terms and in the specified basic rental period. In addition, the leasing contract cannot be terminated either by the lessor or by the lessee (Kroll, 2008, p. 19). Furthermore, the finance lease contributes to a large extent to the amortization of the leased object by the lessee (Goeke, 2008, p. 154). Contrary to operate leasing, the lessee bears the investment risk as well as the obligation to have the maintenance and servicing intervals for the leased object carried out at his own expense (Becker, 2013, p. 218). Since the lessee bears the investment risk, he is also obliged to pay the contractually agreed leasing installments to the lessor in the event of damage. It may be the case that, under certain conditions, the lessee has to pay a leasing installment for a leased object, although it may no longer be available for him to use. It is irrelevant whether the lessee or another party is responsible for the damage (Beigler, 2011, p. 17f.). The focus of finance leasing is on the long-term financing of fixed assets.

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