Lease Financing Model: Lease Financing as a Viable Business Option

Ever heard of businessmen exploring the idea of using an asset on a rental basis on account of a shortage of finance to buy the asset.

In terms of finance, the term ‘Lease’ is defined as ‘an agreement whereby the Lessor (legal owner) conveys to the Lessee (another party) in return for a payment or series of periodic payments (Lease rents), the right to use an asset for an agreed period of time.’

Here, we would be talking more about a specific type of leasing that is ‘Equipment Leasing’

Why does a company consider leasing?

The following are the benefits to a company if it considers investing in capital equipment especially when compared to a cash purchase:

• 100% of the rentals (both the capital repayment and interest) are tax-deductible for a profit-making company.
• In most cases, no large deposit is required.
• Repayments are fixed which makes for easy budgeting;
• Maintains other credit lines;
• Flexible term ranging from 1 to 5 years;
• Easy to upgrade when you need to replace aging equipment with new ones;
• Almost all equipment types can be funded;
• Allows the equipment to pay for its self over the time period;
• Most importantly, it protects your cash flow to cover future unexpected costs or just to give you peace of mind knowing your money is in your bank account and not tied up in equipment.

Why do people invest in Leasable Assets?

Equipment leasing platforms allow you to pool your money with other investors to invest in capital equipment that can be leased to businesses.

The equipment will be sold directly to the lessee as part of a lease-to-own program. Assets that are leased can be electric bikes, batteries, furniture, etc.

The advantages of leasing assets include:

1. Consistent Cash Flow – Fixed lease payments are provided for consistent and high distribution rates throughout the operating periods of most programs.
2. Low Correlation – Thoughtfully underwritten leasing receivables have the ability to withstand the biggest hits to both equity and debt markets.
3. Strong Collateral – Leasing typically provides the lessor with a purchase money security interest (PMSI), meaning the lessor legally owns the equipment. Contrast this with a loan where the lender may have a lien on an asset, which is a significantly weaker position than a PMSI.
4. Less Volatile than Stock Market – There is more stability in the leasing system as the same is not controlled by the market forces but solely by the lease agreement.
5. Returns – As leasing is a relatively stable option, the rate of returns is also more or less stable; also they can offer an Internal Rate of Return (IRR) of up to 20%+ which can further offer an opportunity to diversify one’s portfolio.
6. More beneficial to New Entrants like students or people who have freshly started their career.

Lease Financing Model explained with an example

Say, an electrical vehicle is leased to a company (Lessee), the following terms will be implicated vide this transaction of leasing:

• The title of the vehicle will not be transferred to the Lessee and the same will be returned in case of termination.
• The purchase price will be reduced on account of various subsidies received from the Govt.’s promotion scheme of Electric Vehicles (applicable on electric vehicle leasing linked to promotion scheme only).
• Complete compensation in case of loss of vehicle by the lessee.
• The lessee will be responsible for all maintenance expenses, including repair, accident, running costs, regular maintenance, etc.
• A fixed amount of security deposit would be paid by the lessee to the lessor which shall be returned to the lessee upon completion of the lease agreement.
• A pre-determined percentage would be reserved for management expenses, (normally termed as ‘Management Fees’).

What are the ways or platforms to structure a lease financing deal and invest in it?

Investing in lease financing would require negotiating with the lessee for lease rentals, negotiating with purchase vendors for the lowest purchase price, and doing the due diligence of the lessee and other legal paperwork. This structuring is difficult for a normal investor.

However, platforms like Gripinvest do it for you and all you need to do is complete the KYC, which takes 5 minutes and invest an amount that gives you a return from the very next month.

The expected IRR is as high as 22% (Pre-tax) and the structuring through LLP makes the return totally tax-free in the individual’s hands.

To maximize the returns, the asset class chose which entitles the depreciation rate of 40% and an investor may start as low as Rs.20,000/-which is also one of the reasons for best returns on investment.

Interested to know more about such opportunities? Follow the ITAT Orders blog!

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