Buying, renting or leasing? An overview of financing instruments

As part of Investment decisions Companies have various Financing instruments available. Lease and purchase agreements They are increasingly gaining importance in business practice and, in some sectors such as the automotive industry, are even displacing traditional loan financing from credit institutions. Nevertheless, many decision-makers in the financial sector are unaware of the exact differences and specificities of these alternative forms of financing.

The concept of „leasing“ is closely linked to that of „renting“ and regulates the temporary transfer of ownership of an investment property for a fee. „Leasing“ (English:„renting“) represents a special form of rent. The lessor is in this case referred to as Leasing provider, the tenant as Leaseholder and the rent is referred to as a leasing installment. Unlike ordinary rental agreements, the leasing lessee usually has more obligations and associated risks, such as the risk of technical repairs.

The types of contracts Financing and Operating leasing They differ notably in terms of terms and notice periods. The investment risk (repair costs, etc.) is borne by the finance lessee due to the fixed base lease term. In operating leasing, the investment risk is borne by the leasing entity, since - similar to the rental agreement - there is a short-term cancellation option for the lease agreement.

At the Lease purchase specific features of purchase and leasing agreements are combined.

The financing instruments purchase, lease, leasing and lease purchase will be further defined below with regard to the attribution of civil and economic ownership and the accounting treatment, as well as analyzed with regard to financing and liquidity effects.

Civil law property

• Purchase: When purchasing (using own or borrowed funds), the primary focus is on acquiring ownership. The user of the economic asset is also the civil law owner.
• Rent: When renting, the use of the investment property is the top priority. Buying a property is not planned or possible. This form of acquisition is ideal for short-term projects or to bridge the gap between peak workloads.
• Buying a home: A special feature of the lease purchase is the transfer of ownership of the investment property, which takes place automatically with the payment of the final installment.
• Leasing: The leasing provider is the legal owner. The lessee is restricted in their rights; for example, they are required to take out full-coverage car insurance as part of their car leasing agreements.

Economic ownership and accounting treatment

From a corporate legal perspective, assets owned by the economic owner are subject to the obligation to activate them. An economic owner is anyone who (regardless of legal ownership) has full and long-term control over the asset in question and its proceeds. The economic owner bears the costs of maintenance and the risk of destruction, such as theft.

• Buying and renting: Purchase contracts are generally subject to accounting obligations, meaning the buyer must necessarily include the asset in their investment portfolio and write it off over the normal period of use.
• Rent: Lease agreements are not generally eligible for accounting. Lease expenses are reflected in the lessee’s profit and loss account (GuV).
• Leasing: The balance sheet fate of a leased asset depends on the structure of the lease agreement. The question of the delimitation of economic ownership is particularly important in financial leasing.

With operating leasing, the lessee does not have economic ownership of the asset. The lessee simply records the leasing payments as an expense and thus as a deductible operating expense.

Financing and liquidity effect

• Purchase: The user of the economic asset finances the purchase cost of the asset. A purchase affects a company’s liquidity the most, as the entire invoice amount is immediately disbursed. The buyer has the advantage of acting as a cash payer towards the seller and can negotiate discounts or credit agreements. In the case of self-financing through the company’s cash flow, calculated equity costs must be taken into account.
• Buying a home: The term of the loan is variable and therefore without any tax restrictions. It can therefore last up to 100 % of the operational usage period. The sales tax on the purchase price is due in full at the start of the contract and is deductible. This financing form is ideal for financing, for example, used properties.
• Rent and leasingIt is not the user, but the leasing provider/landlord who finances the business asset and benefits from a lower capital commitment.

The leasing provider can pass on the financing advantage it provides to the lessee through leasing rates that exceed the purchase price.

In the case of rental and operating leasing, the acquisition and production costs are usually amortized through multiple leases to different tenants. In financial leasing, however, partial or full amortization occurs through the lease payments during the agreed basic lease term. In partial amortization contracts, the full coverage of the total cost of the lease is usually guaranteed by a final payment by the lessee.

To reduce the monthly leasing payments, which consist of a profit-neutral repayment portion and a profit-effective interest portion, the lessee often makes an advance payment (between 10% and 20% of the purchase price) at the start of the contract.

Discounts on the purchase price are usually possible if the leasing is carried out on the basis of the negotiated purchase price, for example through an independent leasing bank.

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