“To lease or not to lease – a financing decision”
Companies and experts in special literature often discuss the question whether it is cheaper for a company to buy certain goods on credit or with its own capital. When buying a certain good we moreover have to differentiate between goods that are purchased on lease or bought on credit. This paper does not deal with the fundamental question whether to buy on credit or to lease as it has been proved the advantages and risks of leasing.
The question now is why do companies nevertheless discuss about buying or leasing? Why do companies decide on leasing a wide range of goods from typewriters to cars, trucks and even complete industrial plants? About 11 % of all goods are leased in Germany at the moment. 53 % of which are leasing transactions involve cars. First of all there are considerable differences with regard to the drawing up of a balance sheet. Goods that are bought have to be capitalized with their initial costs while goods that are leased do not have to be shown in the balance sheet of the leaseholder.
Companies do follow completely different strategies regarding this subject. HENKEL (chemical industry) and RTL (broadcasting company) on the one hand have leased all of their cars explaining that this is the cheapest alternative for them. Bayer and 3M Deutschland on the other hand use the same explanation but they buy their cars. Car policies are even different between various subsidiaries of one company.
Table of Contents
1. Introduction
2. History
3. Forms of the leasing
3.1 Operate – Leasing
3.2 Finance – Leasing
3.3 Difference between Operate – Leasing and Finance – Leasing
4. Why Leasing ?
4.1 The Advantages of Leasing
4.2 Leasing in the compares with Loan and Cash
4.3 Disadvantages
4.4 In the tourism industry
5. Summary
Objectives and Topics
This paper examines leasing as a strategic financing alternative to traditional credit or cash purchases for businesses, specifically focusing on its application and relevance within the tourism industry.
- Historical development of leasing
- Comparison of Operate-Leasing and Finance-Leasing
- Analysis of economic advantages versus disadvantages
- Benchmarking leasing against loans and cash investments
- Practical application in the tourism and hospitality sectors
Excerpt from the Book
4.3 Disadvantages
In books, magazines, newspapers and the internet it is difficult to find general information about the disadvantages of leasing. Here are some of the reasons to choose purchase, rather than lease, of equipment. Although not all of them represent disadvantages of lease, they tell us why companies do not choose to lease.
The biggest disadvantage of leasing is that your costs over the life of the asset are generally going to be higher than if you purchased the asset. This is because your rental payments must compensate the lessor not only for acquisition and financing costs, but also for the lessor's retained risk of continuing ownership. Performing a thorough cash analysis is useful in estimating the actual cost differential between leasing and purchasing. You must also pay for the insurance and taxes on the asset which increases the installment payments and overall cost of the equipment.
Summary of Chapters
1. Introduction: This chapter outlines the basic premise of the financing decision between leasing, credit, or cash purchases and introduces the focus of the paper.
2. History: This section traces the origins of leasing from early economic history to its formalization in the late 19th and 20th centuries.
3. Forms of the leasing: This chapter distinguishes between the two primary types of leasing, Operate-Leasing and Finance-Leasing, and highlights their core operational differences.
4. Why Leasing ?: This central section explores the various advantages and disadvantages of leasing, compares it to loan and cash financing, and investigates its specific role in the tourism industry.
5. Summary: The final chapter synthesizes the main findings, emphasizing that leasing is a critical component of modern economic strategy that requires careful appraisal by businesses.
Keywords
Leasing, Finance, Operate-Leasing, Finance-Leasing, Equipment, Tourism Industry, Investment, Cash Flow, Assets, Financing Decision, Cost Analysis, Business Strategy, Capital, Rental, Balance Sheet
Frequently Asked Questions
What is the core focus of this research paper?
The paper primarily investigates the strategic choice between leasing equipment versus purchasing it through loans or cash, evaluating the economic implications for companies.
What are the primary topics covered in the work?
It covers the history of leasing, the differentiation between operate and finance leases, the comparative advantages over other funding methods, and its application in tourism.
What is the main objective or research question?
The objective is to provide a comprehensive analysis of leasing to help businesses determine if it serves as a more effective and flexible financing alternative than traditional purchase models.
Which methodology is utilized in this paper?
The author employs a comparative approach, utilizing economic data and industry reports to evaluate leasing against alternative financing methods and highlighting operational differences.
What content is discussed in the main body?
The main body details the technical differences between lease types, lists the specific financial and operational benefits of leasing, addresses the potential disadvantages, and analyzes data from the tourism and retail sectors.
Which keywords characterize this paper?
Key terms include leasing, finance, capital investment, cash flow management, assets, operational decisions, and the tourism industry.
How does leasing compare to taking a bank loan in terms of flexibility?
Leasing is generally described as more flexible, often requiring less documentation and including fewer restrictive covenants on future financial operations compared to standard bank loans.
What is the primary risk identified with the leasing of assets?
The primary disadvantage noted is that the total costs over the lifespan of an asset are often higher than an outright purchase, primarily because rental payments must cover the lessor's risks and administrative costs.
- Arbeit zitieren
- Beate Pehlchen (Autor:in), 2003, Leasing - "It is the use of equipment, not the ownership, that generates profit", München, GRIN Verlag, https://www.grin.com/document/18119
