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Introduction

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What is a lease?

The simple term lease covers a myriad of different contact types, the common feature of which is that the lessor retains the ownership of the leased asset throughout the life of the contract.

With a multitude of definitions existing in local GAAP, fiscal legislations and in some cases within specific local legislative frameworks for leasing, the only common definition of a lease that can be given on the European level is that provided by IAS17, the international accounting standard for leases, where a lease is defined as "an agreement whereby the lessor conveys to the lessee, in return for a payment or series of payments, the right to use an asset for an agreed period of time".

What is automotive rental?

Two kinds of businesses fall under the category of automotive rental

1) Short term automotive rental

Cars, vans and trucks can be rented to private or professional clients for a relatively short period of time in order to meet their respective transport needs

Typical reasons for making use of such services include:

  • Car rental services can be used as a means of transport to complete a train or plane journey, making sure that the customer arrives at their final destination. Such a service may be used in the context of a business trip or by tourists on vacation
  • Customers may also choose to rent a car as a replacement vehicle when their own car is being serviced or repaired. Many car leasing contracts also include this service.
  • Particularly in an urban context, city dwellers may decide to forgo the use of a private car and would then rent a car on an ad hoc basis. This contributes to less congestion and lower pollution levels in city centres.
  • Customers may require a different type of vehicle for a short period of time such as a van or small truck for moving cumbersome objects or a people carrier for family holidays. A short term rental is the obvious solution in such cases.
  • Truck rental plays a major role in the European economy, providing transport solutions to European firms active in all sectors. In 2006, road transport accounted for 73% of inland modes of freight transport in the EU-25, compared to 17% for rail with the remainder being split between inland water-ways and pipelines.

    [source: Eurostat]
2) Long term automotive rental

Long term automotive rental contracts are a specific kind of leasing, whereby companies who opt for this service outsource their vehicle fleet needs to a leasing company. According to customers needs, the leasing company will provide the necessary passenger cars, vans or trucks to their clients, along with any required related services, including maintenance, insurance, fuel management and/or tyre replacements to name but a few.

In some cases, firms may provide only fleet management services, ensuring the day-to-day management of their clients' fleet needs, without providing the means to finance the fleet.

What kinds of assets can be leased?

Leasing is used to finance a vast range of assets and leases can be tailored to meet the needs of clients, implying that almost any kind of good can in principle be leased.

The most commonly leased assets include:

cars

other yellow goods

production plants

security equipment

rail & rolling stock

trucks & trailers

containers

printing equipment

faxes & photocopiers

infrastructure & utilities

coaches & busses

agriculture & construction machinery

software applications

office furniture

retail premises

forklifts

machine tools

medical equipment

aircraft

office buildings

cranes

vending & catering equipment

computers & other IT infrastructure

ships

hotels & other leisure facilities

For an overview of leasing volumes per general asset category in Europe, visit our Facts & Figures section.

Leasing and its contribution to the European economy

Generally speaking, the economic importance of leasing derives from the fact it provides capital which is used for investment purposes. This in turn translates into a healthy economy, generates employment, and promotes innovation.

The relative importance of leasing and its contribution to the economy can be expressed in terms of what is referred to as a "penetration rate". This is calculated by taking new European leasing business as a proportion of European investment to calculate the share of investment financed by leasing.

Following many years of steady growth, the European leasing penetration rate fell in 2009 to 12% (down from almost 16% in 2008)[*]. Equipment lease finance in particular is an important source of funding. When restricted to equipment and vehicles, the penetration rate decreased from 23% in 2008 to nearly 19% in 2009[**].The penetration rate for real estate leasing was 4.0% in 2009.

What are the benefits of leasing?

The benefits of using lease finance include:

  • The possibility to finance 100% of the purchase price of an asset without having to offer any supplementary guarantees which would otherwise be an additional burden for the company seeking finance;
  • Allowing companies to manage their working capital by spreading payments over the life of the asset;
  • Making budgeting exercises easier as lease payments are regular and usually for a fixed amount;
  • Giving firms the opportunity to renew their equipment, making sure that they benefit from the latest available technologies;
  • Providing other sources of finance, independent from bank loans or credit lines, thereby conveying more freedom to the lessee;
  • Ensuring the lessee has a stable and certain source of funds that cannot be withdrawn as long as payments are made;
  • The ability for the lessee to use equipment or other assets without having to worry about considerations linked to being an owner such as the disposal of the asset when it is no longer used;
  • Providing customers will a full package - a lease can also accompanied by an array of services, including the insurance and maintenance of the asset. A wide range of services can be combined with different types of leases;
  • Taking advantage of local fiscal treatment which implies that leasing can also be beneficial from a tax point of view;
  • Being the only available source of funds. In certain cases, particularly for smaller companies who have high growth potential, leasing may be the only way to finance their development;
  • Generally speaking, providing finance in circumstances when traditional bank facilities would not be granted as lessors have greater security due to the ownership of the asset. This also implies that leasing may be offered on better terms than other forms of finance.

Academic literature

While the figures for new volumes and penetration rates prove the continuing popularity and importance of lease finance, several academic studies have been written to back this idea up.

Leasing is often considered to be a more accessible means of finance than traditional debt. This is particularly true for those companies with low current returns but with high growth opportunities, such as SMEs.

Lasfer and Levis (1998)[[*] have found that the reasons for using leasing depend on the size of the company and that in small firms the leasing decision is driven more by growth opportunities than by taxation considerations, the latter being one of the main reasons that larger companies chose leasing. Results also show that leasing allows smaller companies to survive as small, less profitable companies are more likely to lease than cash generating firms.

Leasing is also preferred to debt by those companies who face agency costs. Studies such as those performed by Sharpe and Nguyen (1995)[[**] support this and based on empirical evidence, they conclude that lease finance is a good tool when a firm is experiencing informational asymmetry problems. Moreover, leasing is thought to be used as a tool to overcome the credit rationing faced by some companies.