Comparison between Operational Lease and other financing methods.
Discover why Operational Lease is different from other financing methods.
Operational Lease is a vital tool for your business. It improves the business cash flow, reduces the depreciable capital and spreads the expense over the entire leasing period. What about the other market alternatives?
Outright Purchase or Finance Lease: what are the impacts?
- The business buys the vehicle with their own cash or via some other form of finance. e.g.: loan
Purchasing a vehicle by using equity, generally means that the company has significant cash reserves. We consider, that using equity in this manner undermines what equity should be used for in a business . In using it in this way has a negative impact on the return on equity required by the shareholders. If the business buys the vehicle with borrowed funds, it will incur financial expenses and ultimately diminish the borrowing capacity of the business for more important investments like plant and stock. In this method of funding all risks on the vehicle remain with the company.
- The business leases the vehicle via a finance lease
In finance lease the risks relating to the asset are virtually transferred to the lessee ( the user) as if they had bought the vehicle outright - as above. During the term of the finance lease the user will generally have paid for the full value of the vehicle and will bear the risk ,should the sales value of the vehicle not match the final balloon payment agreed at the commencement of the lease. Furthermore, because the user carries the residual value risk the vehicle must be shown on the users Balance Sheet.
- The business uses the vehicle under an operational lease
An operational lease is not financing, but a lease. The business buys a service, and therefore will never own the vehicle. As there is no ownership , the vehicle and the lease is an off balance sheet item.
The business makes monthly payments that cover not only the use of the vehicle but also all the services required to use the vehicle: maintenance, assistance, tyre replacement, etc. These payments depend on the model of vehicle chosen, the length of the contract and anticipated kilometers and the associated services chosen.
Operational leasing vs other funding methods
|Full Service Leasing|
|Property||client||client||Leasing Company||Leasing Company|
|Cash immobilisation||100%||30 - 80%||0 - 20%||0%|
|Vehicle's depreciation risk||Client||Client||Client||Leasing Company|
|Services provided to driver||No||No||No||Full|