Investor’s Guide: Minimising Business Operating Expenses Through Leasing

The leasing industry in Nigeria is witnessing increased demand for assets under a given prevalence of rising domestic costs of purchase, shortage of foreign exchange for imports as well as persistent depreciation of the Naira.

For over a decade, the Nigerian leasing industry has consecutively and consistently recorded growth in business transactions. The positive spark witnessed in the sector was a result of impactful visibility of leasing, awareness, high cost of asset acquisition, capital formation in the economy and wealth creation.

The whole essence of leasing is to enhance the planning, improvement and development of any economy.

Equipment leasing is now recognised and established as a creative financing alternative that is being used to meet the world’s equipment needs.

Leasing is the process by which a firm can obtain the use of certain fixed assets for which it must make a series of contractual, periodic, tax-deductible payments. A lease is a contract that enables a lessee to secure the use of the tangible property for a specified period by making payments to the owner.

As Nigerian government and businesses continue to suffer due to scarcity of funds resulting from dwindling oil revenues, leasing can indeed facilitate easy and convenient access to the much-needed capital equipment in these challenging times. Essentially, leasing can play a major role in the diversification and other developmental agenda of the government.

Mr Tunde Oyediran, an economist and a stockbroker said: “in the past, businesses traditionally spoke to the local bank manager and arranged for a business loan to purchase equipment.

“Restricted lending and restrictive lending practices in banks have made leasing the financing method preferred by all types of Small and Medium Enterprises(SMEs) these days. Purchasing assets for your business can be expensive, but if your business is to grow and succeed, such purchases are a necessity. Whether it is purchasing new vehicles, trucks, new plant, office equipment, computers or even furniture, purchasing equipment for a business can have a major impact on cash-flow or credit lines.”

He stated that, “leasing rather than outright purchase of equipment for your business offers many advantages. Leasing is a flexible, cost effective method of financing business equipment with the obvious advantage that the assets capital value is not required up front. If you have found that you require assets for your business but your bank simply will not lend you the money you need, then asset leasing could solve your problem.”

Advantages Of Leasing

Balanced Cash Outflow: the biggest advantage of leasing is that cash outflow or payments related to leasing are spread out over several years, hence, saving the burden of one-time significant cash payments. This helps a business to maintain a steady cash-flow profile.

Quality Assets: While leasing an asset, the ownership of the asset still lies with the lessor, whereas the lessee just pays the rental expense. Given this agreement, it becomes plausible for a business to invest in good quality assets which might look unaffordable or expensive otherwise.

Better Usage of Capital: Given that a company chooses to lease over investing in an asset by purchasing, it releases capital for the business to fund its other capital needs or to save money for a better capital investment decision.

Tax Benefit: Leasing expenses or lease payments are considered as operating expenses and hence, of interest, are tax-deductible.

Off-Balance Sheet Debt: Although lease expenses get the same treatment as interest expenses, the treatment of lease is different from debt. Leasing is classified as an off-balance sheet debt and does not appear on the company’s balance sheet.

Better Planning: Lease expenses usually remain constant over the asset’s life or lease tenor or grow in line with inflation. This helps in planning expenses or cash outflow when undertaking a budgeting exercise.

Low Capital Expenditure: Leasing is an ideal option for a newly set-up business, given that it means lower initial cost and lower CapEx requirements.