Leasing –
simply explained

Key facts at a glance:

• In leasing, a leased object is financed by a lessor and transferred to a lessee in exchange for regular payments.

• The leased object remains the property of the lessor.

• Due to the tax and balance sheet advantages, leasing has established itself as a liquidity-preserving financing method. In the long run, however, it is relatively expensive.

What Is Leasing?

In a leasing arrangement, a leasing company or the manufacturer provides a company with an object for a specified period of use in exchange for a leasing payment. Used for numerous capital goods, leasing is particularly suitable for vehicles, production machinery, or equipment.

There are fundamentally two basic forms of leasing: operating leasing and finance leasing. In finance leasing, the investment risk is transferred from the leasing company to the lessee, so the leasing company only bears the credit risk. In operating leasing, by contrast, maintenance and risks from damage or theft remain with the lessor.

The model is largely similar to renting, as the underlying contract can be terminated at any time and the term is usually short. After the end of the primary lease period, the company typically has the option to purchase the leased object, extend the contract, or return the item.

What Are the Advantages and Disadvantages of Leasing?

The greatest advantage of leasing lies in preserving liquidity. Compared to a purchase financed with equity or debt, existing credit lines are generally not affected.

In addition, leasing also offers balance sheet advantages, as it rarely requires equity to be used or new debts to be taken on. Leasing fees can usually be financed through operational cash flow and are often tax-deductible as business expenses. Furthermore, the regularity of leasing costs facilitates business planning.

However, even though a leasing agreement may offer certain short-term tax and balance sheet advantages compared to a traditional loan, overall it is often more expensive than other forms of financing. Moreover, leasing does not grant the lessee ownership rights, but merely the right to use the asset. Consequently, leased objects cannot be used as loan collateral, for example.

What Types of Lease Agreements Are There?

In leasing, there is indirect and direct leasing. In the latter, the contract is concluded directly between the lessee and the manufacturer of the leased object. In contrast to this "manufacturer leasing", indirect leasing involves an institutional leasing company as an intermediary. This company concludes the contract with the lessee.

Lease agreements are also distinguished by so-called full or partial amortisation. While in partial amortisation the leasing payments do not cover the full purchase price of the object, in full amortisation they do, so that ownership can transfer to the lessee at the end of the term. In partial amortisation, the leased asset is returned to the leasing company at the end or acquired at a residual value. Real estate leasing or sale and leaseback are special forms of leasing.