Purchasing fixed asset is still a complex task. Thus, leasing becomes the preferred solution to fix the current requirements of the asset. There’s a famous quote by an American Publisher, Donald B. Grant which states, “Why own a cow when the milk is so cheap? All you need is the milk and not the cow.” Here cow can be compared as ‘an asset’ and milk as ‘right to use asset’. Similarly, a person can use machinery under a leasing agreement to manufacture products, instead of owning it. For instance, for freelancer buying a single computer probably makes sense. While on the other hand, a startup with team of several employees will need multiple systems, hence, it may want to look into leasing computers. These instances put a shallow light on the concept of leasing, where lessor allows lessee to use the asset in exchange of specified payments, which eventually resolves the lessee’s temporary requirement of the asset. Ultimately, leasing becomes a win-win situation that benefits both the parties involved in it.
It is often when customers decide to buy any heavy equipment, appliances or maybe land, second thoughts strike over their mind on buying, due to their financing problems. There are many people who couldn’t afford to pay the full prices upfront or meet such immediate payment terms, especially for big-ticket items. On the other hand, it becomes challenging for vendor of high-priced equipment to close a sale/deal with clients not able to pay all the capital upfront. In order to aid this situation, the concept of vendor leasing was emerged. Vendor leasing is a novel financing solution that allows an additional option to customers, through which they can choose besides cash-on- delivery and 30 days terms payment. Aligning with other leasing companies, vendors offer leases to their customers, where outside leasing firm substitutes as the vendor’s captive finance company. This way vendor leasing helps in preventing vendor’s clients from walking away from their company without making any purchase.
Generally, vendor leasing is a pay-for-use model for customers, while for vendors it is way of stimulating their sale. Undertaking this program, many companies are providing convenient and affordable financing options to their customers at the time and place of purchase, which is ultimately resulting in selling more products. A significant element of vendor financing is the established relationship between the borrower and the vendor.
Most of the equipment vendor lessors decide to outsource equipment leasing, and rest of them make it an in-house financing program. By offering a financing program to customers, the vendor makes a cash sale while receiving the funding from the finance company. This enables a vendor to have additional funding available for its companies’ own cash flow needs. Considering the structure of the deal, the vendor collects the money and then turns it over to the finance company, or as per case the customer pays the money to the finance company directly. It is possible that credit checking and operational administration may also be handled by the finance company.
When taken tax deductions into consideration, vendor leasing can be proven to be beneficial for tax credits. By taking advantage of Section 179 Qualified Financing, a firm can write off the full amount of the equipment without even paying the full amount. This way a firm may be able to deduct its payments as a business expense depending on the lease.
Digitalization of Leasing
Be it appliances, gadgets, or space, everything is available at lease. According to the Equipment Leasing Association of America, there are approximately 80 percent of U.S. companies those who prefers to use some or all their equipment on lease and there are some thousands of equipment-leasing firms nationwide catering to that demand. Taking into consideration the current demand, there comes a need to use digital technologies to develop new and enhanced customer propositions or risk losing market share.
It has become significant for finance providers to embrace the potential for intelligent software to transform their business operations by automating manual tasks and allowing employees to focus more on customer service excellence. From need generation to engagement and evaluation, documentation and quotation, releasing of funds, post purchase, the whole operational process of leasing can be evolved through means of digitalization. In a digital world, the entire customer journey has multiple touch points and mediums such as web, app, telephone, and even social media to capture customer experience and feedback. The data collected can be further analyzed to build a continuous improvement journey that improves customer experience, loyalty, and ultimately revenue growth.
The concept of vendor leasing aptly justifies the idea of leasing the treatise, “Wealth is in use, not ownership,” which was written around 350 BC. Considering the rapid evolution of markets, we can say that vendor leasing is changing the landscape of various industrial sectors.