26 3 Reduction of External Funding Needs
Germany is the largest leasing market in Europe, followed by the UK and Italy. It has been
estimated that leased assets account for approximately 20% of corporate capital investment
in the UK and Germany. In 2005, leasing accounted for almost a quarter of all investments
in equipment (movable capital goods) in Germany.^16
Forms of leasing. Leasing typically allows the lessee to use assets without any
down payment obligation. Leasing can take many forms.
Leasing can be indirect or direct. In indirect leasing, a leasing company acts as
an intermediary between a customer and a manufacturer. In direct leasing, the
manufacturer leases the object directly to the lessee.
It is also possible to distinguish between operating leasing and financial leas-
ing. Operating leasing is a form of short-term financing. In financial leasing, the
lessor (typically a financial institution) buys an asset which it leases to an end-user
for a substantial proportion of the asset’s life. Hire purchase agreements are based
on similar legal principles as financial leasing.
The leased assets can consist of movables (cars, machines, equipment) or im-
movables (land, buildings, business premises). Movable capital goods are inher-
ently more leasable than immovables. The leasing of immovable assets is typically
governed by special legal rules and will not be discussed here.
The lease transaction can be complemented with ancillary services such as op-
eration and maintenance (O&M) or installation services.
Benefits. Firms use leasing for many reasons.
- Liquidity. Leasing is a form of financing which leaves credit lines and existing
collateral unaffected. In addition, leasing payments can be coordinated with fu-
ture cash flow (pay as you earn). - Tax. Leasing can bring tax benefits to some firms. Tax questions are outside the
scope of this book. - Balance sheet. Operating leasing is a form of off-balance-sheet financing.^17
- Costs. Leasing can, in exceptional cases, be less expensive than debt finance,
where the firm, due to an unfavourable credit rating, either is unable to borrow
money or is able to raise debt only at a high cost. - Convenience and flexiblity. There may be operational reasons for leasing. For
example, leasing can mitigate the risk of equipment becoming technically obso-
lete.
Legal aspects in general. The legal aspects of leasing depend on the form of leas-
ing. However, some general remarks can be made.^18
(^16) Bundesverband Deutscher Leasing-Unternehmen, The Leasing Market 2005; Leaseu-
rope, Leasing Activity in Europe - Key Facts and Figures in 2005; The European Rental
Association, The European Equipment Rental Industry 2008 Report.
(^17) However, external credit-rating firms take into accounts payment obligations under leas-
ing contracts.
(^18) See also DCFR IV.B.