What is Financial Leasing, Its Types, and How to Choose the Appropriate Financial Leasing Company

What is Financial Leasing?

Financial leasing is a type of financing that allows the lessee to use a specific asset owned by the lessor during a specific period, in exchange for paying periodic rents to the lessor. At the end of the contract term, the lessee has the right to own the leased asset at a remaining value

Financial leasing differs from regular leasing in that the lessee in financial leasing bears most of the economic risks related to the asset, including depreciation and decline in value. In financial leasing, the lessee also has the option to purchase the asset at the end of the contract, which gives the lessee the advantage of owning the asset without having to pay its full price.

Financial leasing is commonly used to finance capital assets, such as cars, equipment, and real estate. Financial leasing provides many advantages to tenants, including:

The ability to get the asset they need without having to pay for it in full upfront.

The possibility of financing the asset through fixed monthly installments, which facilitates financial planning.

The ability to benefit from tax benefits associated with the asset, such as depreciation deduction.

Here are Some Examples of the Use of Financial Leasing:

A company wants to purchase a new car to use in its business. She can use leasing to get the car without having to pay for it in full up front

A company wants to purchase new equipment to use in its production. They can use financial leasing to acquire equipment without having to pay for it in full up.

A company wants to purchase a property to use as its headquarters. She can use financial leasing to acquire the property without having to pay for it in full up front.

What are The Types of Financial Leasing?

Capital leasing

It is a type of financial leasing in which the lessor (finance company) transfers ownership of the asset to the lessee (companies) at the end of the contract term. A capital lease is similar to a loan, where the lessee pays monthly or quarterly installments for a specified period of time. At the end of the contract term, the lessee has the right to purchase the asset at a residual value.

Risks and advantages of capital leasing:

Capital leasing provides a flexible financial solution for businesses that need assets without having to purchase them.

Capital leasing can help companies improve their liquidity by spreading the cost of an asset over a longer period of time.

Capital leasing can help companies take advantage of the benefits of consumption tax.

A capital lease can be more expensive than a loan in some cases.

The tenant may be required to pay additional fees at the end of the contract term, such as maintenance fees or transfer fees.

Operating leasing

It is a type of financial leasing in which the asset remains owned by the lessor for the duration of the contract. The lessee pays monthly or quarterly installments just for the use of the asset. At the end of the contract term, the lease ends and the asset returns to the lessor.

Risks and advantages of Operating leasing:

Operating leasing provides a flexible financial solution for businesses that need assets for a specific period of time.

Operating leasing can help companies improve their liquidity by spreading the cost of an asset over a shorter period of time.

An operating lease does not transfer ownership to the lessee, so the lessee has no right to purchase the asset at the end of the lease term.

Operating leasing may be more expensive than capital leasing in some cases.

What Are The Advantages And Disadvantages Of Financial Leasing?

Advantages of financial leasing:

Providing Liquidity: Financial leasing can provide liquidity to the lessee by financing assets up to 100%, allowing them to allocate their other financial resources to their basic needs.

Payment flexibility: The tenant can choose how to pay rents in proportion to his cash flows, whether equal, increasing or decreasing, or in one payment at the end of the contract period.

Avoid technical risks: The lessor bears the risks of technical maintenance of the asset, providing the lessee with peace of mind.

Possibility of final purchase of the asset: The lessee has the right to purchase the asset at the end of the contract period at a pre-determined price, allowing him to own the asset without having to obtain new financing.

Disadvantages of financial leasing:

High rental cost: The monthly or annual rental cost may be higher than the cost of traditional financing, due to financing interest being calculated in the rental value.

Inability to dispose of the asset: The lessee does not actually own the asset until the end of the contract period, and therefore cannot dispose of it by selling, leasing, or assigning it except with the approval of the lessor.

Commitment to the contract period: The lessee bears the obligation to pay rents throughout the contract period, even if the asset is no longer needed.

Financial Leasing Law

It is an Egyptian law issued on August 14, 2018, and regulates the activity of financial leasing and factoring in the Arab Republic of Egypt. The law aims to provide an integrated legislative framework to regulate this activity, and to protect the rights of all parties concerned with it, including landlords, tenants, and regulatory authorities.

Law No. 176 of 2018 regulating financial leasing and factoring activities.

How To Choose The Appropriate Financial Leasing Company?

Choosing a financial leasing company is an important decision, as it affects your financial commitment for a certain period. Here are some tips that may help you choose the right financial leasing company:

1-Understanding your needs: Determine the purpose of the financial leasing and the length of the period you wish to benefit from the financed property or services.

2- Evaluate offers and prices: Compare the offers available from financial leasing companies based on interest, fees, payment terms, and any additional conditions.

3- Reputation and evaluations: Look for evaluations and comments about the company from previous customers. These references can give you details about the quality of service and adherence to agreements.

4- Terms and Conditions: Carefully read the rental terms and conditions. Make sure you fully understand the terms regarding payments, insurance, and other contractual matters.

5- Customer Service: Check the level of customer service provided by the company. You can examine how customer inquiries and problems are handled.

6- Insurance: Ask for information about the insurance options available to you and how emergencies or unexpected matters are dealt with.

7- Certifications and Compliance: Check if the financial leasing company holds the relevant certifications. For Example:

Certified Lease & Finance Professional (CLFP): This globally recognized designation, offered by the Certified Lease & Finance Professional Foundation, validates expertise in equipment leasing and financing. It covers areas like financial analysis, lease structures, documentation, pricing, and ethics.

Certified Commercial Investment Member (CCIM): This prominent accreditation demonstrates proficiency in the field of commercial real estate leasing and investment. The CCIM Institute administers the programme, providing individuals with knowledge on market analysis, property valuation, transaction structuring and negotiation.

National Association of Lease to Own (NALTO) Certifications: NALTO offers various certifications for professionals involved in lease-to-own financing, including the Certified Lease to Own Professional (CLTOP) and the Certified Lease Sales Professional (CLSP). These programs focus on consumer protection, ethical practices, and regulatory compliance within the lease-to-own industry.

Central Bank Approvals: Many countries have their own central bank or financial regulatory authorities that oversee the operations of lease companies and may require specific licenses or approvals based on the types of leases offered and the company's financial standing.

Equipment Leasing and Finance Association (ELFA) Certifications: ELFA, a prominent trade association in the Equipment leasing industry, offers various educational programs and certifications for leasing professionals. These programs cover topics like accounting, legal issues, risk management, and best practices in the equipment leasing sector.

Finally, search for companies: Search for reliable Financial Leasing Companies with a good reputation. You can view the directory of financial leasing companies in Egypt through the full Egypt Yellow Pages directory to find the perfect match for your specific requirements.

References:

2- Elfa Onilne

4- Bloom Berg

5- Forbes