Low risk form of financing
The leasing sector has proven that, even during economic crisis periods, it is a consistently low risk form of financing with low losses compared to traditional lending. This is due to the fact that lessors own and manage the leased assets they finance, with this specialist business expertise bringing many benefits.
The leased asset has a huge impact on credit risk
Leasing firms are different to other types of lenders for two main reasons:
- they focus on physical or intangible assets for business investment (like trucks, machinery or software) and are experts in these products
- they remain the owners of the asset, with lessees simply paying for use.
As owners and asset experts, when a customer defaults on their contract leasing firms are able to repossess the asset and sell or release it, keeping losses low. As leased assets are normally critical pieces of equipment needed to run a business, this is normally not necessary as customers tend to prioritise lease payments over other commitments. Therefore, leasing default rates tend to be lower than those for traditional loans, and the number of defaults that return to a healthy payment status again are high. For lessors, asset risk management is part of their core business. Other lending products are typically not secured on the basis of physical collateral (e.g. other lenders have a preference for guarantees, etc.) as providers of these products do not have the same expertise as lessors when it comes to evaluating and managing physical assets.
Lessors are asset specialists
- The value of the leased asset is built into the lease price and forms the main security, other forms of collateral are often not required
- Lessors maximise recoveries through sale/re-lease of the leased asset, building tailored approaches to managing and realising residual values
- Remarketing experts with asset specialisation assess the disposal possibilities
- Lessors have access to local and global resale markets, including direct channels to their own customers, vendor networks, wholesale, online marketplaces and auctions, maximising asset sales
- Close partnerships with manufacturers help to reduce asset risk, including buy-back options
Extensive research
Leaseurope, together with Deloitte, analysed around 3 million lease contracts across Europe during the depth of the financial crisis. This research shows that leasing is low risk in comparison to traditional lending due to the role of the leased asset. Cologne University has also produced an academic paper using the same dataset which emphasises that current capital requirements regulation vastly overestimates the risks for leasing portfolios.