What is the main difference between Leasing and Renting?
When we talk about financial leasing, we actually refer to the English concept of leasing . This term refers to a rental, a lease, with a final purchase option. This type of contract is used mainly by SMEs (small and medium enterprises) because in the end it is a financing formula. It allows to reduce the expense and improve the liquidity of the corporation, without minimizing the options of using a specific asset that could be decisive for the production or general development of the company.
In other words, financial leasing allows you to try a product, get the most out of it, and decide later if you want to buy it . The purchase of a good is financed through a contract during a specific time and, when it ends, the buyer has three options on that good.
The first option is to buy it. In this way you pay a residual value, which is derived from applying the difference between the purchase price (plus interest) and the money you have already paid for your rent. What can also be done is to extend the contract, so that the lease of the property continues for a longer time. The last option is to return it and not execute the final purchase.
Some examples of assets in which financial leasing is used are in company cars or in industrial machinery.
What the financial lease offers
This type of contract, which offers the ability to buy on a property after a rental period, allows the investment to be fully financed and is not part of the commercial financial risk because the property is not bought, it is only rented.
This for banking purposes, means that there is no financial risk. With the lease you can also obtain tax benefits, since the amortization fees can be assessed as a tax expense, and the total value of the leased assets (a company car, machinery, etc.) can be deducted as an expense.
However, what can not be applied is the payment of the residual value of the good, if the final purchase is carried out.
On the other hand, the lease has to meet a series of requirements such as the purchase option and have a duration that does not go below two years for personal property and 10 years for real estate. The quotas must appear in the contract, in such a way that a distinction is made between recovery of the cost of the good and the financial burden.
Comparison between leasing and renting
We must take into account first of all that financial leasing and renting are two very similar concepts but that they have a key difference: renting does not entail a possible final purchase of the property that is rented.
The financial lease is designed to act on assets that can be used in an economic activity, which means that it applies only to companies. This does not happen in the renting. This can be carried out both companies and individuals. It is a mere rental operation, so the company that exercises the lease does not have, in any case, a final purchase option of the property.
In the case of renting you can talk about some advantages that are included in the monthly payment. If we give the example of a car, this rent is included in its maintenance, the payment of taxes on its use (such as the tax for circulation), and insurance. These services can be extended, but it depends on the type of contract. This is not considered in the case of financial leasing, except in exceptional cases, so it is logical that the renting fees are higher in a general way.
What also distinguishes leasing and renting is the duration of the contract. In the case of the lease, as already mentioned, the minimum time stipulated is two years in movable property and ten in real estate. It moves in long-term contracts .
The renting, meanwhile, has more flexible contracts that approach the medium term and there is a commitment to return if problems arise, but the state must be adequate. However, in both circumstances, the contract of the asset is renewed.
Tax benefits of financial leasing
In the financial lease there are a series of tax benefits. But, to access them, the contract must meet a series of requirements. First, the landlord in question must be a credit institution or a financial institution.
The leased property must be related, in any case, to the activity stipulated in the contract. Each good can be directed to perform different activities, but must always be linked to the one that appears in the lease.
The interest payable and the recovery part of the cost of the property must also appear in the contract, which must be equal or increasing according to the duration of the contract.
In financial leasing it is very important to always set a purchase option . If this is not done, the figure itself does not make sense for the parties, nor could the tax benefits derived from this figure be accessed. It must also include the option to extend the lease in question. Finally, the net tax value must be greater than the purchase option, since this value is the result of reducing the price of the acquisition.