To Rent or Not To Rent

To Rent or Not To Rent 

For the last ten years Rental and Operating lease have been a popular and effective way to finance the purchase of new equipment. This month I am going to highlight some of the advantages and disadvantages of entering into this type of financing facility.

Probably the key benefit of renting is that the monthly repayments are usually lower than with a Commercial Hire Purchase or Finance Lease assuming the Lessor has taken an undisclosed residual position, having said that in today’s tight credit markets this benefit is becoming somewhat marginalized.

Most commonly touted benefits:

1. Ownership rights rest with the lessor. At the end of the contract the goods are returned to the Lessor.

2. The equipment can be upgraded within the term of the lease.

3. Generally lease rental payments are fully tax deductible. However you should seek independent taxation advice, as this may not be applicable to your situation.

4. Equipment can be replaced at the end of the lease term with the latest technology without the cost of disposal of existing equipment.

5. In many cases there are Balance Sheet implications of an operating lease or rental agreement whereby the Lessee does not have to disclose the liability of future payments.

No doubt the key disadvantages of operating Lease or Rental are in the Terms and conditions which vary quite a bit from Lessor to Lessor.

Some examples:

1. Rollover payment which are additional  payments contracted under the lease if the lessee fails to meet various administrative requirements

2. Inertia payments or rent paid after the initial contractual term has expired often without the Lessee realizing

3. Excess use charges are incurred when the Lessee exceeds the a contracted number of hours or pages utilized by an asset on a lease this can increase the cost of ownership by as much as 20% to 30%

4. Onerous return conditions such as wear and tear charges and  costs to return equipment to interstate locations  can add unexpected costs

5. An early termination of  a lease often has hidden penalties that exceed the discounted sum of the remaining payments

When considering to Lease or Rent the most important consideration is the issue of ownership. When renting the Lessor always retains ownership so if at some time in the future you wish to own the asset you will have to purchase it from the Lessor at a value acceptable to them. In some case’s this may be the best way to go particularly if at the end of the fixed term you are confident you will no longer have a need for the asset. Below are some things to consider prior to making this decision:

Key Considerations
1. The operational life of the asset
2. Impacts of technology changes on the asset
3. Volatility of the future value of the asset
4. How critical  the asset is  to the day to day operation of the business
5. Ease at which the asset can be upgraded or replaced

I think it is important to point out that there is no right or wrong answer to the question as it highly dependant on individual business circumstances and often the answer is not clear cut, therefore I would recommend at least getting an opinion from your accountant or business advisor.

Tom Radovanic
Director
True Lease Pty Ltd
http://www.truelease.com.au/

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