Leasing in Entrepreneurial Practice

In some countries more equipment is financed today by equipment leases than by bank loans, private placements, or any other method of equipment financing.
Nearly any asset that can be purchased can also be leased: from aircraft, ships, satellites, computers, refineries, office-buildings, warehouses, shopping-centres   and steam-generating plants, on the one hand, to typewriters, duplicating equipment, automobiles, and dairy cattle, on the other hand.
According to the German Association of Leasing Lessors, 60 % of German companies currently use leasing each year to acquire the use of over 55 billion € of capital equipment and real estate.
In the USA we heard from the American Association of Equipment Lessors.     80 % of American companies currently use leasing each year of over 100 Billion Dollars.

In order to compare leasing with other methods of financing, it is necessary to understand the basics of how leasing works and the differences among the general categories of equipment leases and real estate leases.

1. Definition and how Leasing works

Leasing is a difficult concept to define.
Essentially, it involves one party providing an economic good and another making use of it over a fixed period of time.
This period is often related to the economic life of the commodity.
Leasing is an alternative to purchasing or renting, but has features in common with both.
The user (lessee) does not have to be the owner of the asset.

A lease is a contract wherein over the term of the lease, the lessor (owner) permits the lessee (user) the use of an asset in exchange for a promise by the latter to pay a series of lease payments.
Most corporate financial executive recognize that earnings are derived from the use of an asset, not its ownership, and that leasing is simply an alternative financing method.
While this recognition seems axiomatic today, it was not always a belief shared by financial executives.
Leasing was regarded as a last resort form of financial transaction that prestigious and financially strong companies simply did not undertake.

A typical leasing transaction works as follows.
The user-lessee then decides on the manufacturer, the make, and the model.
The lessee specifies any special features desired, the terms of warranties, guaranties, delivery, installation, and services.
The lessee also negotiates the price. After the equipment and terms have been specified and the sales contract negotiated, the lessee enters into a lease agreement with the lessor.
The lessee negotiates with the lessor on the length of the lease; the rental; whether sales tax, delivery, and installation charges should be included in the lease; and other optional considerations.

After the lease has been signed, the lessee assigns its purchase rights to the lessor, which then buys the equipment exactly as specified by the lessee.
When the property is delivered, the lessee formally accepts the equipment to make sure it gets exactly what was ordered.
The lessor then pays for the equipment, and the lease goes into effect.
Rentals are usually net to the leasing company.

Real-Estate-Leasing has naturally some other ways in contracting.
If the entrepreneur will use a new building, then he determined the special kind, the need square-meters, and the place which will be built.
The lessor will buy the land, planned the object, ordered the building contracts to the building company at first, there is an agreement over the estimated total costs with his lessee and after signing the lease contract.
Will the entrepreneur sells his building and leases it back then an expert estimates the worth as the basics for the negotiations with a lessor. If there an agreement is than the leasing contract can be signed.

Except in short-term operating leases, taxes, service, insurance, and maintenance are the responsibility of the lessee and may not be deducted from rentals.
At the end of the lease term, the lessee usually has the option to renew the lease, to buy the equipment, or to terminate the agreement and return the equipment.
The options available to the lessee at the end of the lease are very significant in that the dimensions of such options determine the nature of the lease for tax purposes and the classification of the lease for financial accounting purposes.

When all costs associated with the use of the equipment are to be paid by the lessee and not included in the lease payments, the lease is called a net lease.
Examples of such costs are property taxes, insurance, and maintenance.
Most long-term lease financing transactions are net leases, especially in the sector of real estate leases.

2. Forms of the Product

2.1. Finance and Operating Leases
There are two forms of leases: finance leases (which have more in common with bank loans) and operating leases (which have more in common with rental).
These two categories hang on the issue of who actually bears the economic risk of the asses (i.e., the residual value risk).
If it is the lessee (the user), it is a finance lease. If it is the lessor (the investor), then it is an operating lease.

It is important to distinguish here between legal ownership and economic ownership.
Legal ownership refers to formal property titles, as recorded in official documents.
Economic ownership revolves around the issue of who bears the risk of economic obsolescence. This is not necessarily the legal owner.
In the case of finance leases, the lessee is in fact the economic owner, but as a rule in most countries the lessee will only gain legal ownership at the end of the contractual term.
In the case of operating leases, the lessor has economic ownership by definition and is generally also the legal owner.

The definition of the concept “economic ownership” is determined by the degree to which residual value risk is actually incurred.
This requires an assessment of the residual value in relation to the market value at any given time.
A lease in which the residual value is reduced to a nominal sum does not qualify as an operating lease. In this case the lessee, not the lessor, is the economic owner, and the agreement is still classed as a finance lease.
To meet the defining criterion for an operating lease, the lessor should run a realistic price risk. The question as to what constitutes “realistic risk” in such a case is partly determined by economic reality and by risk assessment.

When an option to purchase is fixed too low, the lessee is in fact economically obliged to make use of the option, because he will be forfeiting a price advantage if he fails to do so.
Such a situation is termed an urgent option. However, by definition this remains  a purchase option rather than a purchase obligation, as the latter implies transfer of the residual value risk to the lessee, which would make the product a finance lease.
The differences between finance leases and operating leases are fundamental.
Generally speaking, a finance lease involves 100 % financing of an asset with a contractual term related to the lifespan of the goods.
To this extent, it has much in common with a bank loan.

An operating lease is more akin to rental. The lessor is the investor and bears the economic risks of the asset. He will therefore also enter the good on the asset side of his balance-sheet.
The lessee obtains full use of the good during a period shorter than its economic life.
He can decide at a given time to acquire legal title of ownership to the goods, subject to the conditions of the lease.

Although financial and operating leases are essentially different concepts, it is not always possible to distinguish them clearly from one another.
The chalk lines on the field where leasing is played are not clearly marked, and they may even be redrawn in the course of the match.
Furthermore, the playing field itself varies widely from country to country.

A distinctive characteristic of leasing is the split between user’s rights and proprietary rights.
The philosophy behind the leasing product is that use is more important than title.
On the other hand, there is no strict dividing line between ownership and usership, as is the case with rent.
The renter has, in principle, no title to the goods as property, whereas a lessee may well have.
In the long run, leasing offers the possibility of acquiring legal ownership of the goods. With rental, this is never the case.

2.2. Service Leases
In Addition to the main products described, there is also a form known as the “service lease”. This involves an extension of the service provided by other services connected to the goods.

The best-known form of service leasing for an entrepreneur is the full-service car lease, where the leasing contract includes such services as repairs, maintenance, insurance, tyre replacements, road tax and fuel consumption.
In this form of leasing, the right of use for the entrepreneur has been elaborated to its fullest extent.

Another example of a sector offering service leasing is photocopiers.
Photocopiers are usually rented or leased, and the charges are normally based on the number of copies made.

There are two different systems for service leasing, which vary according to the form in which the customer pays.
Under the so-called “open calculation system”, the customer is charged on the basis of the actual amount of the services used.
The entrepreneur as customer periodically receives information on his usage and is billed accordingly. The period of the lease is therefore variable.
Under the “closed calculation system”, the customer is charged on the basis of a previously set price, regardless (within certain basic limits) of the volume of usage.
The advantage to the customer of a closed system is that costs may be planned in advance with total accuracy.
The disadvantage is that the customer may end up paying for services he does not use.

2.3. Sale- and Leaseback Transaction

A sale-and-leaseback transaction involves the sale of an asset by the owner to another party and the simultaneous execution of a lease agreement whereby the original owner agrees to lease the asset from the new owner.
The most common types of property in a sale-and-leaseback transaction are
buildings, plants, and other facilities.
When the sales price is greater than the book value, any profit after considering the costs associated with the transaction (for example, legal expenses and finder’s fees) is given in the profit and loss account in the year of the sale.

3. Laws and Legislation
In most countries there are no “Laws for Leasing”. Examples are Germany and Great Britain.
On the other side there are countries with a dedicated “Leasing-Law”. For example: France. Since 1963 has France the business regulated as a special kind of banking business. Next France has in the European Union Romania, Italy and Belgium legal laws corresponding legal rules for leasing.
In Russia are specifications to the business in leasing regulated in the “Civil-legislation book” of Federation of Russia and in the “Federal Law over Financial Renting (Leasing)” from October 29., 1998, Nr. 164, with amendments from January, 29.,  2002.
In Real estate is an obligation to register the leasing contract in a state register. First after this registration the real estate leasing contract is complete.
One advantage is for example the accelerated depreciation for leasing objects.
An other part is that lessor and lessee can arrange who is the balance-sheet owner of the leased object.
In principle there is a clear definition of leasing. If the partners make different contracts of the legal rules in the law, the business can be irregular with following negative problems in taxation.
The three important areas which require clear legislation: the annual accounts (in which balance sheet are goods capitalized), the fiscal aspect (who may apply depreciation for tax purposes, who can make use of any tax benefit) and civil right, who is the ownership, or the right to use the good as collateral are exactly regulated in the Russian Leasing Law.
Some flexibilities are given. For instance the lessor or the lessee – after a       private arrangement - can be takeover the insurance position.

4. Motives for Leasing – why Lessees Lease

What are the reasons for taking a lease through an entrepreneur, and what are the advantages and disadvantages of leasing?
These are naturally key issues. To some extent, the motives can be derived directly from the product characteristics.
One important point is that the added value of the lease product has to be assessed against the background of the possible alternatives.
Leasing is, after all, a hybrid between purchasing and rental, with features of both, so that in each case the entrepreneur will be asking himself whether he can gain the same product advantage through purchasing or renting
So we can see the “Value proposition lease product”.
- Liquidity
- Flexibility
- Balance ratio’s
- Residual value risk
- Outsourcing
- Convenience
- Budgeting
- Tax advantages

So the Decision of the entrepreneur can be: Assessment purchase alternative. Assessment rental alternative or Assessment lease solution.

Finally, the entrepreneur will always base his decision on his own specific needs.
A business with ample funds available will not place as much importance on the liquidity advantages of leasing as a business with liquidity problems.

So there are three aspects involved in the assessment of the added value of a lease:
-the specific features of the lease product
-the assessment oft the pros and cons compared to possible alternatives
-the value which the individual customer places on certain product features.

Clearly, the evaluation of the product features will also be influenced by local and regional circumstances. The stage of development of the local economy, the quality of the banking system, and the sophistication of the legal system are some of the important factors.
In Eastern Europe, for instance, there is high demand for leasing, but there are only few strong capitalised leasing companies and a lot of the demand enterprises have no clear balance-sheet. It can be improved.

4.1. Liquidity
Leasing generally finances 100 % of the investment, whilst bank loans often offer less favourable percentages of the capital (50% to 70%).
This is one of the key advantages of leasing, and one which still attract entrepreneurs to it.
However, the more sophisticated the banking system becomes, the more this advantage loses its significance.
If a debtor has good credentials, bankers are prepared to grant a 100% loan.
For the less qualified debtors, however, this does not apply; in that case leasing does offer liquidity advantages.
In addition, leasing can offer solutions tailored to the cash-flow pattern of a company.
The leasing terms can, for instance, be adjusted to the specific cash flow of seasonal businesses or specific projects.

4.2. Flexibility
Leasing offers the opportunity to opt for shorter terms, sometimes with interim get-out clauses.
This sort of flexibility is becoming increasingly important in an era in which businesses are being to become more adaptable. Obviously, flexibility comes at a price, and one which should be acceptable to the customer.
But it is a relative concept with an entirely different meaning for an investment in real estate compared to an investment in a truck, for example.

4.3. Solvency/balance sheet ratios
Leasing offers an alternative to self-investment, whereby the goods do not have to be shown on the balance-sheet (off-balance solution).
This makes it possible to reduce the balance sheet or to prevent it from being extended.
The balance sheet ratios therefore appear more favourable than in circumstances where the assets have to be stated.
For some businesses, this is a decisive argument in favour of leasing, especially when performance is being assessed (partly) according to the quality of the financial ratios.
For this factor to count, the investment concerned must, of course, be a large one.
Leasing is therefore often favoured for investments in real estate. For many US companies and similar for a lot of European companies, keeping real estate investments off-balance is strict company policy.

This solvency argument is somewhat controversial. Some regard the off-balance aspect as a form of “balance-sheet-cosmetics” which any critical financier would see through immediately.
The art lies in distinguishing the authentic from the fake. A business which takes its own premises off the balance-sheet via a sale-and-lease back transaction will be regarded with suspicion.
But if the company has already been renting the premises for some time, and subsequently purchases it and puts it on an operating lease basis via sale-and-lease-back, it is, economically speaking, still in the position of a tenant.
Whether it will actually be considered as such by the auditor and the tax authorities will depend on the extent to which the lease satisfies the regulations in force.

4.4. Forming out residual value risk
Through leasing, the residual value risk of certain investments can be transferred from the entrepreneur as lessee to the lessor.
This advantage is especially important for goods which are not only capital intensive, but where the investor cannot easily recover the residual value at the end of the lifespan.
Examples are large computer systems (mainframes), expensive telephone installations, and photocopiers. This is also an important argument in the case of capital goods subject to rapid technological obsolescence.

The benefit becomes even greater when combined with the flexibility argument.
In this case, the user has, via the interim get-out clause, the option to change his obsolete equipment for something more up to date.
He carries no residual value risk and always has the use of state-of-the-art equipment.

4.5. Outsourcing
Leasing offers the possibility to contract out responsibility and (management) concern for the maintenance and management of capital goods.
A well-known example of this is vehicle fleet management.

To manage and maintain the quality of the vehicle fleet costs a great deal of time and money, which an entrepreneur or a company might prefer to spend on other things.
Leasing companies have the know-how and expertise to take over these tasks from the customer.
Usually, the customer company obtains a better service at a lower price than it would get by performing the tasks in question itself.

Outsourcing is becoming an increasingly important aspect of the leasing industry.
Entrepreneurs and Companies are becoming more and more willing to contract out services if they perceive advantages from doing so. The demand for this form of service provision is therefore growing, and leasing companies are continuously offering new applications in this area.
Similar are strong growing the services in connection with real estate leasing. Here the customers can get a full service from his lessor for the planning, construction, supervising the building which will be leased.
Real estate leasing companies have own daughter-companies for a 100% service round a new building. In cooperation with construction companies there can be the price and the termination fixed. All risks are given to the real estate company during the building time.

4.6. Convenience
Leasing can also be a means o realizing convenience aspects.
The driver of a leased car does not have to worry about maintenance, receives substitute transport if the car is in for servicing or repair, fills up on gas with the
Lease company’s fuel card, does not have to keep administrative records or produce receipts in order to claim expenses.
Such advantages may be an important reason for the entrepreneur as a user to consider leasing.
However, it is no exception from the ancient rule that “there ain’t no such thing as a free lunch”.

4.7. Budgeting – Calculation of the Lease Rate
Leasing can contribute to the entrepreneurs to improved control over business costs, since fluctuations can be eliminated through fixed lease terms.
The entrepreneur as the user knows exactly where he stood. He can, as it were, buy security with leasing.
It is possible that a lessor can provide an entrepreneur-lessee with a more economical cost of financing than they can secure through other means.
For this to occur, however, there need to be significant difference between the lessor’s firm and the lessee’s firm on some dimension.
How is the lessor able to offer a lower cost financing that is not related to a tax issue?
It is possible, that the lessor is able to purchase assets at a more favourable price due to volume purchases or better negotiation ability.
It can be able to get better prices for equipment at lease end than the lessee.
The lessor may be able to develop a less expensive equipment configuration than the lessee has thought of and, as a result, are able to offer what appears to be a very attractive lease rate.
There are endless possibilities.
Lessors can pushing rate easily reduce leasing to a commodity.

Marketers have long stressed the importance of focusing on the perceived product or service, emphasizing all the ways in which the delivered service is not a commodity.

4.8. Tax advantages
Sometimes tax advantages are available from taking a lease which is difficult or impossible to obtain otherwise.
For instance only if there a real estate leasing than in Russia you can accelerate – 3 times higher as the normal rate – the annual depreciation. Depreciations reduce the profit of the company and therefore there is a tax advantage here in Russia in lower property taxation.
As the parties in Russia have the right to arrange who takes the leasing project in his balance-sheet can the tax advantages in this area optimised.

Tax leasing has a greater economic advantage than borrowing when lease term exceeds the tax depreciation life of the equipment to be financed. Also, the bigger the spread, the better.

Through the maximum lease contract term on equipments from 60 months and longer there can be created also such tax advantageous in Russia.

4.9. Controlling Technology

Leasing is often said to enable the technology user to transfer the risk of technological obsolescence to the lessor.
If specific technology will only be worth 80 cents a Euro in three years to the user, how could it be worth more to the lessor?

It really is difficult to get a sophisticated answer to the question “Why do you lease” from technology lessees.

Our views on why entrepreneurs or organizations lease technology equipment encompass one or more of the following reason:

(1) Technology equipment is leased because the entrepreneur or a  management cannot emotionally bring itself to buy equipment that will be so much useless vapour in a few short years;
(2) Leasing technology equipment makes it easier for technology specialists to migrate to new and improve equipment sooner than would be the case if their organization owned the equipment (they get hassled by their accountants);
(3) Large organizations have both capital and operating budgets. Once capital Rubel  have been committed, the only way to acquire needed technology -equipment is to obtain it under operating leases so it can be financed out of he operating budget;
(4) Technology equipment makes for fairly lousy collateral should an organization need to borrow to purchase it on a secured loan basis.

Surveys conducted by me indicate clearly that lease “rate” is far from the most important consideration in technology leasing.
In this special arena of leasing activity, upgrade terms and conditions, purchase options, renewal options, and early out provisions are more important issues.

4.10. Summary
Why the entrepreneurs are focusing on leasing – what issue or issues will leasing resolve in their mind?
It is a budgetary issue?
An accounting issue?
It is a political?
Knowing what it is they are trying to accomplish should suggest how those goals are best realized.
According to our surveys, some lessees are focused on getting out of leases on equipment they no longer need, while others have a mandate to bring technology for a monthly budgeted amount.
These are very different needs, and the lease provision/options offered in each case should reflect the prospect’s priorities.

The parade of motivations to lease is a long one. There is a number of leasing incentives along with a lot of tips that the enterprises can help and prospects solve their financing needs.
In such a vast, open-ended industry, I would never pretend to offer an exhaustive array of tools and tips through the lessors.
A motive to lease can be economic or non-economic. There are a number of leasing incentives that fall into each category.
The more incentives to lease is written, the more effectively the lessors will be able to identify lease financing opportunities for their clients.
The really good news is that, with all the possible reasons to lease, the lessor only need to find one for each prospect!
The leasing success in the long haul results from helping a client enterprise or a client company solve a financing problem in a manner that is mutually beneficial.

There does not have to be a winner and a loser in a leasing negotiation.
I believe success derives from both parties entering into a transaction because it is in each party’s self interest to do so.

Furthermore, lessee enterprises or firms are talking to each other more and more these days due to increased educational opportunities and greater electronic networking capabilities.

5. The Value of the Lease Product

After a company’s or enterprises market positioning has been determined, the question then arises of how much value is created with the lease product.
By formulating the question in this way, we place the customer at the centre of attention. It has already been stated that a product-based approach makes little marketing sense today.
Changes in the market are happening so fast that a product-oriented approach will almost always be behind the times.
Knowledge of the nature of customer requirements now offers the only basis for developing a sound strategy.
It is also the only way to predict and anticipate future market developments.

The value of the lease product can be determined by the motives for taking lease, we heard before.
The named motives – liquidity, flexibility, solvency, farming out residual value risk, outsourcing, convenience, controlling technology, budgeting-leasing rate,   and tax advantages.
These motives indicate why a customer might make use of leasing.

From this starting point, we can infer the type of solutions the lease product offers the customer.
When we look at the benefits from this point of view, the following problem areas emerge: finance problems (e.g., making funds available for investments), cash flow problems (providing enough liquidity to guarantee an uninterrupted flow of payment streams), cost problems (controlling and lowering company costs as much as possible), risk problems (whether the future book values of assets can be realized or not), control and management problems (problems flowing from the management and maintenance of certain assets or groups of assets –such as vehicle fleets).

These five problem areas indicate the kind of solution offered by leasing.
The next question to be examined is the extent to which leasing offers better or more cost-efficient solutions than alternative products.
We will examine this issue in more detail for each of the problem areas.

5.1. Solutions for Financing Problems

Whether leasing is the most appropriate solution to a financing problem depends on a number of factors.
It is important, for example, to know the other options, if any, that are available to a customer seeking to finance an investment.
One alternative to leasing, for instance, would be a medium-term loan.
However, banks have doled out such support for several decades with a very tight fist. Substantial long-term loans were simply not granted.
Only very healthiest companies were eligible.
Leasing therefore offered a unique advantage for companies who would not be eligible for major bank loans.

In most European countries, the banking system is now well developed and there is a wide choice of financing products.
The time when leasing could offer a unique financing solutions has gone.
Today’s customer will be in a position to weigh up the benefits of leasing against the option of a bank loan.
The following factors play a role in this choice: the quality of the customer, the nature of the goods, the price and speed (convenience).

5.2. The quality of the customer
The higher the quality of the customer, the more options he will be offered at the bank.
In the case of very sound companies, the security value of the asset to be financed is less important, because banks will be prepared to grant unsecured credit up to a certain point.
Consequently, the value of leasing increases as the security value of the asset concerned becomes a more important factor in granting credit.
This last aspect will apply to customers in a somewhat higher risk category, or customers for whom the size of the investment requires good, asset-backed collateral.

5.3. The nature of the goods
The security value is also of course related to the nature of the goods.
The added value of leasing is greatest for standard goods for which there in an active second-hand market.
A more general rule is that the added value of the leasing company is strongly determined by the extent to which it is able to manage residual value risks.
Specialization according to categories of goods is becoming increasingly significant, and re-marketing also appears to be growing increasingly international in character.

5.4. The price
In choosing between different financing alternatives, price obviously plays an important role.
For a proper price comparison, it is important to have equivalent products, which can lead to problems in the case of leasing.

Does leasing offer cost advantages over a bank loan? For a proper comparison, a pure finance lease should be compared to a bank loan, because otherwise other value elements would have to be taken into consideration which could interfere with the comparison.
Price differences may stem from cost of funding, margins and taxation differences.
There may be differences in funding costs between a leasing company and a bank.
These differences will, of course, not arise where the leasing company and the bank belong to the same organisation. In Europe this is often the case, as 75 %  of leasing companies are allied to banks. Banks and leasing companies will therefore often have the same level of funding costs, so that no cost advantages can be expected here.
In the case of leasing companies which are not allied to banks, the price difference will often be to the disadvantage of leasing, because the funding costs of these leasing companies are generally higher.

To the margin there is a referring to the mark-up over and above funding costs.
Leasing is, on the whole, more labour-intensive because of the documentation needed.
Standardization is much further advanced with bank loans than with leasing, and, moreover, sales of bank loans are much higher.
This means hat cost advantages will lie with bank loans than with leases, and the margins on leases will therefore usually be higher than those on bank loans.
In practice, however, it is often difficult to trace this price difference, for instance when leasing offers more liquidity than a bank loan. The products are then no longer identical, so that the comparison is no longer valid.

5.5. Taxation difference included cross border leasing
Sometimes cost differences occur for fiscal reasons deferment in various countries in the past.
Leasing sometimes offers advantages in these cases which could not have been obtained with a loan.
More generally, it should also be mentioned that the international market for cross-border leasing is almost completely geared to obtaining tax advantages.
Here I have no time for describing special tax rules for leasing in the world.
To the leasing in Russia I can reference to the leasing-law from 1998.

6. Partnership Management Approaches from the Leasing Sector

There are two distinct types of leasing companies working with large corporate customers – general leasing companies and focused leasing companies.
Their partnership management needs and best practice approaches differ in important ways.

6.1. General
General leasing companies have broad product portfolios and typically aspire to serve corporate customers with a broad range of products.
A general leasing company’s approach to partnership management will be focused on a strong need to improve lending-based economics and to enhance the coordination of a broad product portfolio.
Their priorities for partnership management are focused on the need to leverage traditionally strong relationships and enhance penetration across a wider product range.
With large corporations, a name-by-name segmentation strategy based on a leasing company’s specific relationship with its customers is a critical first step.
Segmentation may result in the identification of a number of client groupings, each of which is characterized by distinct product usage and decision-making behaviour.
The partnership manager’s business development role needs to be clearly separated off from other activities. Partnership manager’s roles and skills should be aligned with those of corporate decision-makers. Some client segments are likely to warrant more than one partnership manager.
Performance measurement and evaluation should be driven by profit yardsticks, include peer review and capture actual behaviour and activities.
Partnerships plans are a key element of supporting processes and tools needed to shape a more teamwork-based general culture.

6.2. Focused
A focused leasing company’s approach to partnership management will concentrate on the need to enhance coordination amongst highly competent product specialists, and to maintain a teamwork approach over long “boom and bust” product cycles.
Its customer segmentation will differ in important respects from that of a general leasing company; prospective fees and industry expertise are more useful criteria.
The definition of roles will be driven by the highly specialized nature of its business, and will be closely tied to skills.
The measurement of economic performance is typically based around revenue and productivity yardsticks, while evaluation systems should reflect individual performance, team performance and contributions to building the franchise.
Performance measurement and account management systems will include more qualitative criteria for individuals than for business units.

Best-practice approaches are always used to focus sales activities (segmentation should evolve from an undifferentiated to a needs-based approach, with “size of wallet” driving the intensity of the sales effort), leverage product specialists (increased segmentation will lead to better targeting of customers’ product needs, promoting cross-selling and the identification of structured solutions), and improve sales force efficiency and effectiveness (a tailored, IT-based toolbox should be provided to enhance sales force efficiency and effectiveness).

Best practice approaches reflect the urgent need to develop a new and better value proposition more appropriate to the absolute potential of each customer.
Successful implementation of partnership management requires a good fit between product capabilities and partnership management aspirations, a clear design for implementation, a well-executed pilot program, execution of a small number of key short-term tasks and a sustained focus on creating a partnership culture.

7. Concerns of Manufacturers/Vendors in Establishing a Product Sales Financing Program - Opportunities for Leasing

A manufacturer can provide financing for its customers in many ways.
Some manufacturers offer financing directly to their customers.
Others have established captive finance companies to achieve greater efficiency in financing their products.
Many companies supplement their own sales financing by taking advantage of vendor leasing programs offered by third-party leasing companies.

7.1. Objectives of Product Sales Financing Programs

In order to formulate a program for financing its products a vendor must first identify, review, consider, and weigh the objectives and desired results to be achieved by such a program.
These objectives generally include as many of the following results as possible:

1. The ability to provide medium- and long-term financing to its customers without carrying a receivable on its balance sheet.
2. The ability to report the transaction as a current sale for financial accounting purposes, thus immediately recognizing the profit on the sale.
3. The generation of maximum cash from the transaction as quickly as possible.
4. The generation of cash without recording a liability.
5. The deferral of state income tax on the sale as long as possible.
6. The ability co claim depreciation on as much of the retail sale price as possible.
7. Where a cash sale is not possible, the recovery of the entire retail price of the product over the life of the lease or instalment sale, plus interest, from the lessee’s unconditional obligation to make payments plus the value of any residual that the lessee can reasonable expect to receive.
8. Where the lessee does not own the property at the conclusion of any lease or conditional sale, the realization by the vendor of the maximum residual value.
9. An assignment of any stream of receivable payments for cash on a nonrecourse or limited recourse basis and at a minimum discount.
10. The management of earnings over several years.
11. A structure that will not require the lessee/purchaser to account for the translation as one or more of the following:
a. A liability on its balance sheet.
b. A liability prohibited or limited by its loan agreements.
c. A capital expenditure for budgetary purposes.

12. A 100 percent financing package that is attractive to the lessee/purchaser
from the standpoint of term and cost.
     13.Isolation of financing profit from the profit on the sale of the product so as  
          to achieve an accurate measure of product profitability.
     14.Avoidance of overhead expense involved in billing, collecting, and
         accounting for receivables.
     15.Control of the aftermarket for financed or leased equipment.
     16.The ability to finance large amounts of equipment year after year without
          exceeding borrowing capacity.
    17. The programs offered by the vendor should not be so inexpensive and
          efficient that its products will not attract outside sources of financing.

It is not possible to achieve all of these objectives in a given situation.
Some of the objectives are inconsistent with others.
An arrangement that permits a vendor to report the sale as currently completed for financial accounting purposes, while at the same time claiming deductions, challenges the imagination.
However, financial executives devote considerable effort to achieve such results.

7.2. Instruments Used to Finance Equipment – Especially trough Leasing-Systems 

Instruments used by manufacturers, their captive finance companies, dealers, and third-party leasing companies to finance equipment sales and accomplish their objectives include the following:
- Instalment sale contracts, in which title passes to the purchaser immediately and the sale price is paid in instalments, usually at a fixed rate, for a term that approximates the conservative estimated economic life of the equipment to be financed.
- Leases intended as security, in which title passes to the lessee at the conclusion of the lease (a) when the last payment is made, (b) upon exercise of a bargain purchase option by the lessee, or (c) upon exercise of a put by the lessor. This type of instrument is called a conditional sale lease, a money-over-money lease, or a hire-purchase agreement.
- Tax-oriented true leases, in which the lessee either has no purchase option or the lessee may acquire title at the conclusion of the lease by exercise of a fair-market-value purchase option. True leases include short-term operating leases.
- Option-leases, in which the lessee can purchase a motor vehicle at the end of the lease or during the lease under a terminal rental adjustment clause.

The choice of a particular method of financing may depend on the vendor’s income tax situation.

7.3. Captive Finance Companies – Build Your Own Leasing Company

Any vendors engaged in providing extensive product financing for its customers must consider the advantages and disadvantages of providing such financing through a wholly owned finance company.
Among the advantages cited as favouring the formation of a captive finance company to provide product financing are the following:

- Reduction of borrowing by the parent. Borrowing funds for financing products through a captive finance company will reduce direct borrowings that the parent might otherwise have to make, thus preserving the borrowing capacity of the parent for other needs.
- Increase in the overall borrowing capacity. A captive finance company can borrow significant funds on the basis of its own balance sheet. Finance companies generally enjoy a much higher degree of leverage with their lenders than do industrial companies. This makes it possible to use a captive finance company to enhance the total borrowing capacity of the parent corporation.
- Access to new sources of funds. The captive finance company may be able to obtain access to long-term fixed-rate borrowings not available to the parent due to other borrowings of the parent, restrictive covenants, regulatory problems, or industry borrowing practices.
- Off-balance sheet debt. As this book goes to press, the borrowings of a properly structured captive finance company do not have to be reflected on the balance sheet of its parent company. Rather, the parent company’s balance sheet shows only its equity investment in the captive finance company.
- Debt rating of parent. The debt rating of the parent may not be affected by finance company borrowings within normal debt-to-equity and debt-coverage ratios.
- Reporting a sale for financial accounting purposes. Financing operating leases through a captive finance company may enable a parent manufacturer to report such transactions as sales for financial accounting purposes rather than as operating leases. Profits on such sales can be reported immediately, whereas profits on operating leases by the manufacturers are measured by manufacturing costs and must be taken in over the life of such leases.
- Cost accounting and profitability measurement. A manufacturer can more easily determine the performance and profitability of its operations and products by isolating financing revenues from sales revenues.
- Increased sales. Where a manufacturer would not otherwise provide financing for its products, there are various marketing-related reasons for financing products that favour the establishment of such a subsidiary. These reasons include customer need, possible incremental sales to marginal credits if financing is provided, ease in handling trade-ins, and less complicated financing of improvements and upgrades. Many manufacturers confine the activities of their captive finance companies to financing products sold to customers that are unable to obtain financing from conventional source and to being lenders of last resort for such purchases. Such manufacturers rely on third-party leasing companies and other financing sources to provide any needed financing to their creditworthy customers.
- Control of equipment aftermarket. A captive finance company can be used to maintain better control over the equipment aftermarket than is possible if reliance is placed on outside sources for financing. This can also be a source of substantial profits.
- Customer contact.  A manufacturer enterprise can maintain better customer communication and interface through financing provided by a captive finance company than through financing provided by outside sources.
- Profitability. A finance subsidiary can earn substantial profits for its parent.
- Control of sales force. Better discipline and control of the sales force may be possible using a captive finance company.
- Image.  The perception of the stockholders, directors, and the financial community is that the company is doing everything possible to promote sales and earn profits while utilizing the prudent controls inherent in an arm’s-length captive financing structure.

7.4. Third-Party Vendor Lease Financing Programs

Product sales financing for the industrial enterprises can be provide directly or indirectly through third-party vendor lease programs.
Many companies rely entirely on such third-party vendor programs to provide product sales financing. Some companies utilize such programs to supplement their own product sales financing programs.
In any event, a strategy for providing product financing must carefully consider the use of third-party vendor finance programs as en efficient method for achieving product financing objectives.
Manufacturers use and rely on third-party vendor lease and finance programs for many reasons, including the following:

- Balance sheet benefit. Third-party finance programs permit vendors to remove receivables and debt from their balance sheets.
- Reporting a sale.  Third-party leases and discounting programs permit a vendor to report a transaction as a completed sale for financial accounting purposes, with immediate recognition of profits on the sale.
- Cash flow.  The vendor realizes immediate cash where a third-party lessor provides financing. The cash realized can exceed 100 percent of the sales prices if there is an interest rate differential.
- Improved tax benefits.   By having the vendor’s captive finance company enter into a partnership with the third party and the vendor financing the sale price to the partnership, the vendor can claim its partnership share of benefits.
- Low lease rates.  Where the vendor cannot claim tax benefits associated with equipment ownership, a third-party lessor offering true leases can provide low-cost competitive financing for the vendor’s products.
- Reduces debt. Use of a third-party lessor eliminates or lessens the need for the vendor to provide debt for financing its products and the resulting adverse effect on the vendor’s financial statements.
- Reduces need for a captive finance company. Third-party lessor financing obviates some or all of the need for forming, administering, and arranging debt for a captive finance company.
- Reduces staffing needs. Reliance on a third-party lessor for product financing lessens the need for staffing that would otherwise be required for direct vendor financing. Third-party lessors can sometimes provide training to the vendor’s sales force and assist with customer calls, promotional advertising, and brochures.
- Lessor administers lease.  In the case of a full-service vendor lease program, the lessor relieves the vendor from documentation, billing, collecting, accounting, and other administrative costs.
- Image.  Using a well-known third-party leasing companies with a nationwide presence for financing enhances the image and marketability of the vendor’s products.
- Training and education.  A third-party lessor can be used initially when instituting a vendor financing program, with a view to eventually taking over the program after the vendor’s employees gain some experience in lease financing.

A third-party lessor will be inclined to assume greater credit risk if it has an opportunity to participate in the credit decision. Another approach used by lessors and vendors to solve the credit exposure problem is a credit grading system whereby the lessor agrees to accept credits that meet certain standards and takes expected credit losses into considerations in its lease pricing, based on such standards.
Third-party lessors are sometimes asked to assume considerable risk regarding the residual value of equipment leased under vendor programs utilizing true leases and operating leases.
Residual risk and pricing go hand in hand. The greater the residual risk assumed, the lower rentals will be and the more attractive the lease will be to the vendor’s customers.

In some instances, residual value insurance can be used to achieve certain accounting and tax objectives of vendors, lessors, and lessees.
However, residual value insurance is expensive. Typically, premiums of up to 10 percent of the amount to be guaranteed are charged at the inception of the lease.

8. Outlook

The size of the leasing market is primarily determined by general economic factors, and particularly by developments in the volume of investment.
Leasing is a product that derives its existence from investment in capital goods.
Economic growth is therefore a basic parameter for the size of its market.

In the modern industrialized countries, the economic structure is undergoing a steady shift towards a service economy, which in turn leads to a shift in the nature and scope of the demand for leasing.
In view of the lower capital requirements of the service sector, the shift from industry to services will probably have a negative effect on leasing volume.
In other words, the demand for leasing from enterprises is likely to be greater in an industrial economy than in a service economy.
Otherwise there are permanent new applications for leasing. For example leasing will also emerge in expanding sectors such as health care.
Russia has the prospect of long-term and structurally high economic growth.
The economic development is not yet always completely balanced. It is to advocate a policy of restructuring government financing, curbing inflation and stimulating economic growth.
In the light of a massive backlog in infrastructural development, huge investments in the field of civil engineering are in prospect.
There is a shifting in the typical size of companies.
Business growth is no longer happening in the industrial giant, but more in the small and medium-sized enterprises (SMEs).
This is partly due to the growth in the service sector, where SMEs are well represented, but is also due to the “lean” policy of large companies and the trend towards decentralization in the form of creating independent business units.
The process of outsourcing non-core activities should also be remembered here.

These will create a demand for the financing or leasing of the required construction machinery from increasing numbers of enterprises.
In agriculture, too, then Russia will play a rising important role in the global market.
The combination of wealthy oil and gas resources, of cheap land, cheap labor and modern technology will create great opportunities for Russia.
Only the use of modern agricultural techniques will also entail the use of modern agricultural machinery through farmers’ entrepreneurs or enterprises, these could of course become interesting in terms of leasing potential.

Innovative leasing company should be able to thing up appropriate solutions in this area. The leasing product can be a part of the economic stimulation policy.