Why would you choose for leasing?

Did you plan important investments?Then you are certainly aware of the different ways to finance this investment: with own means, by a credit arrangement with you financial institution, entering into an operational or financial lease. Why should you choose for leasing? In the next paragraphs, we list some of the advantages.

Immediate quantifiable advantages

Leasing has a number of advantages which are clearly quantifiable. Leasing is often the 'cheapest' financing method, compared to the alternatives.

Via leasing you can finance the investment up to 100%, while credit providers (banks) usually only finance up to 70% or 80% of a project and expect a contribution of the investor for the rest amount.

You can as entrepreneur make the lessor pre-finance the VAT on the planned project. It is after all the lessor which will pay the VAT on the asset and recover it from the Treasury. When you as entrepreneur make the investment yourself, you can also recover the VAT, but the repayment can take three up to six months. In case it concerns an important investment, the cash flow disadvantage can have important consequences. By shifting the pre-financing burden to the lessor, you gain an important advantage.

After all leasing also leads to advantages of scale: leasing companies can often obtain better conditions from the supplier by buying large quantities, which you cannot obtain as a small company. If you negotiate well with the lessor, you can also profit from these discounts.

Not immediate quantifiable advantages

Next to this, leasing also has a number of not immediate quantifiable advantages which are worthwhile to be taken into consideration when making new investments.

The lessee is better protected against technological aging: companies working in high technological sectors can better opt for a short term lease, whereby the asset has a high residual value. The lessor bears the risk of the technological aging of the leased assets. For leasing companies this risk is however more remote than for individual companies. After all they have a network and can sell the technologically aged assets to other players on the market for which the assets are still useful.

For leasing contracts generally a smaller down payment is required than for other financing methods. The lessor has an important advantage compared to other financiers: he maintains the legal ownership of the leased assets. Consequently he can act in a more flexible way without bearing additional risk. However it should be stressed that the general credit worthiness of the lessee and the evolution of the market value of the asset will always play an important role in defining the concrete conditions of the contract.

For an entrepreneur the undisturbed use of an asset as long as it is useful is often more important than having the ownership of the asset. Such undisturbed use can as easily be obtained through leasing as through ownership.

Aren't there any disadvantages?

Does leasing only has advantages? Unfortunately not. Especially for real estate leasing there are potential disadvantages. Two important tax related obstacles exist:

Stamp duties: each transfer of real estate is subject to stamp duties, for which the applicable rate in Flanders amounts to 10%. In case of a real estate lease, there may (possibly) be two such taxable transfers:
(1) The contract starts by definition with the taxable transfer of real estate. This can only be avoided in case it concerns a “new building” subject to VAT. This is more interesting since in most cases VAT can be recovered.
(2) At the end of the contract when the lessee ops to purchase the asset. At that time there is a second transfer of ownership (from the lessor to the lessee). This transfer is taxed on the actual value and not on the option price.

VAT: for VAT purposes the risk exists that the immovable lease is considered as a rent. The rent of immovable property in Belgium is VAT exempt. This implies that the lessor cannot deduct the VAT paid on the building or acquisition of the immovable property.