Biotechnology on lease
Probably, the first leasing transaction was the transfer of a prehistoric man of his spear to a neighbor. In exchange for a portion of the loot. Such operations have been carried out at all times and under all economic formations. With different names, their essence was the same: not being the owner of a certain tool, to get this tool for temporary use with the payment of certain resources for the right to use it. The effectiveness of leasing becomes obvious if the process of obtaining a certain resource is decomposed into components.
Buying a resource
Action one: The company chooses a certain resource for the acquisition of property, based on the needs of its business.
Action two: If the financial resources available to the company are sufficient to purchase a resource, the process of exchanging finance for a resource takes place. If there are not enough finances, you have to apply to financial organizations for a loan, which is used to make up for the missing funds. At the same time, it is necessary to confirm the presence of assets capable of acting as a guarantor of the repayment of the costs of the credit institution in case of failure of the company.
Action three: The resource becomes the property. He is being exploited. Taxes are paid to the state for its use as a fixed asset. If it was purchased with borrowed funds, payments on credit obligations are added. After the expiration of the depreciation period, it is written off. And replacement with a new one.
Despite its simplicity, the scheme is very inefficient. From the point of view of finance. Firstly, when acquiring ownership, you have to immediately part with finances, which are excluded from circulation and reduce the return on investment (Return on Investment - ROI) and return on assets (Return on assets - ROA). Secondly, the problem with getting rid of outdated equipment. And this is an additional expense. Third, taxes. All this bouquet of problems and payments has led to the fact that the use of equipment obtained on lease has become one of the main methods of increasing the efficiency of the enterprise by reducing costs.
We lease the resource
Action one: The company chooses a certain resource to acquire ownership based on the needs of its business.
Act Two: Unlike purchase, leasing determines the amount of monthly or other payments. Usually payments are made evenly.
Action three: The resource goes into operation to the lessee. However, it remains on the lessor's balance sheet. All taxes related to the equipment are paid by the lessor. Depending on the chosen leasing scheme, the resource is used until the expiration of the lease agreement. After that, it is either redeemed at a fixed minimum conditional price, or replaced with something else with the renegotiation of the contract and recalculation, or simply returned to the lessor.
The advantages of such a simplified scheme are that the lessee does not pay taxes on the resource, controls cash flows, and has the opportunity to reduce equipment costs. And, most importantly, it gets the opportunity to protect against the moral aging of the resource.
By leasing the equipment, the lessor receives the following benefits:
- after the expiration of the contract, you can sell the equipment or re-use it in leasing operations. This will lead to the fact that the equipment will bring at least twice the income significantly exceeding the income from direct sale;
- uniform and predictable distribution of financial revenues;
- a significant increase in turnover, by 35 percent, when compared with the standard sales scheme.
Although these schemes are very conditional, they give an idea of the pros and cons of both resource acquisition schemes. Leasing schemes for biotechnological equipment do not differ much from standard schemes. Although there is also its own specifics, because leasing of biotechnological equipment has a much shorter history. The start was given a decade and a half ago. Now most large corporations have structural divisions engaged in leasing. According to the survey, about 12 percent of biotech equipment companies rent.
What caused such a rapid interest in leasing? In all likelihood, one of the reasons should be considered the high rate of moral aging of equipment. The resulting need to replace equipment every three years leads to an increase in the cost of storing obsolete equipment, for its disposal.
However, there is a factor that may play on the side of his opponents in the future. It is estimated that leasing of equipment for a period of two to three years is attractive for both the lessor and the lessee. After the end of the lease agreement, it retains a certain part of its value. This makes it attractive for reuse after appropriate processing.
The benefits of purchasing or leasing equipment must be determined without generalization. There are no universal recipes for happiness. Therefore, it is necessary to know the components of this recipe. To choose the components according to your understanding.
If we make a mechanical comparison of the costs of purchasing equipment and leasing payments, the final amount of the latter will almost always be higher. This is the paradox of the attractiveness of leasing for both parties.
There is a special coefficient for determining lease payments. It looks something like this (leasing of computer equipment for a period of 36 months):
Stable company
The total cost of leasing equipment is up to 15,000 dollars, the coefficient is 0.03614.
The total cost of leasing equipment is over 15,000 dollars, the coefficient is 0.03529.
Start-up company
The total cost of leasing equipment is 5-10 thousand dollars, the coefficient is 0.03922.
The total cost of leasing equipment is 10-20 thousand dollars, the coefficient is 0.03721.
What does this coefficient mean? Using simple arithmetic operations, you can get the amount of monthly payments. For example, a start-up and sustainable company leased equipment for 20 thousand dollars under a contract. Multiplying the total cost of equipment and the coefficient, we get $744.2 per month for a start-up company and 705.8 for a stable one. The difference in payments is caused by the high risks of working with a start-up company with a short credit history.
The coefficient is derived using various variables: interest rate, lease term, type of equipment and its future value.
In which case is leasing profitable and how to evaluate this benefit?
Leasing in the roughest approximation is a sequence of investments over a certain period of time. Therefore, standard methods for evaluating the effectiveness of investments, such as Weighted Average Cost of Capital (WACC), Net Present Value (NPV), allow you to evaluate all the pros and cons.
In America, there is such an expression: "A dollar is worth a lot more today than in the future." Very roughly, this phrase can be translated as "the value of today's dollar is higher than tomorrow's dollar."
To assess the importance of such comparisons, we use a small example. The company purchases equipment worth three thousand dollars with a service life of three years. With a simple acquisition of ownership, a one-time investment of three thousand dollars is obtained. With an interest rate of 8 percent, payments are received in the amount of $ 89 per month. However, in the end, you have to pay a slightly larger amount - $ 3204 - than if you acquire ownership. In fact, if we count correctly, future cash flows should be brought to the current deadlines for the evaluation of the project. After correcting the error and calculating the NPV for the lease agreement, we get $ 2,698. The total savings on the lease agreement will be (1-2698/3000) - about 10 percent.Naturally, there are many leasing schemes that have their own characteristics. Knowing their pros and cons, you can choose the most effective, according to the circumstances.
Types of leasing
Finance Lease (also called "Conditional Sale"). Its peculiarity is that it combines the benefits of leasing and the advantages of ownership. Lease payments are paid over several years and are often equal to the full cost of the equipment. The advantage of financial leasing is that upon completion of the contract, you can get the equipment into ownership at a purely symbolic price. For example, one dollar.
True Lease or Tax Lease. When using this type, the company leasing the equipment is the legal owner of the equipment. This option is very advantageous for obtaining equipment subject to rapid moral aging. This type of leasing gives lower monthly payments to technological obsolescence of equipment such as computers. At the end of the contract, there are three ways to go. Purchase the equipment in the property at the real market value, extend the lease agreement or return it to the lessor.
Operating Lease. Usually - short-term leasing (about three years). At the same time, all the risks of ownership are shifted to the lessee. Monthly payments are understated. This type of leasing is characterized by the fact that the equipment is, as it were, out of balance and is not fixed as an asset or liability. In addition, the lessee has no obligations in relation to the further fate of the equipment. Although, upon completion of the contract, he can purchase the equipment in the property.
Skip Lease. When using this type of leasing, payments are made unevenly and in certain months. This option is good for those companies whose activities have seasonal breaks.
60- or 90-Day Deferred Lease. This type is very similar to financial leasing. With this method, no advance payment is required, and the first payment does not occur before the second or third month. It is beneficial to those companies who lease equipment that will begin to generate income after a few months.
Pre-Paid Purchase Option. This type of financing makes it possible to significantly reduce lease payments due to prepayment of a certain share of the cost (10, 15, 20 percent). Upon completion of the lease agreement, the equipment becomes the property of the lessee for one dollar.
In addition to these very simple methods, there is a much more flexible and complex leasing tool - Leverage leasing. With such a scheme, the lessor, without fully purchasing equipment, invests from 20 to 40 percent of the funds. The remaining part is laid out by a third party - the lender. This type of leasing allows you to carry out transactions with equipment whose cost is significant. Although this method allows you to involve small companies in the leasing process, it has a very significant drawback. Without a long credit line, the lessor company will have problems attracting the necessary resources. A company that credits a leasing transaction risks on a par with the lessor with incomparably large risk capital.
Source: bizworld.ru