For many self-employed people, leasing continues to be an attractive alternative to financing, because leasing has 3 decisive advantages over financing: a higher liquidity rate, balance sheet neutrality and tax advantages in the depreciation of costs. In this article, freelance editor Janina Meinhardt, author of Finanztip, describes the main features, advantages and remarkable features of leasing from the point of view of commercial leasing customers with a focus on vehicle leasing.
The advantages of vehicle leasing (movables leasing)
The advantages of movables leasing result from the fact that in the case of leasing, the leased asset must always be capitalized by the lessor and therefore also depreciated (balance sheet neutrality and higher liquidity due to the continuity of the equity ratio), the lessor takes over the initial financing (which does not burden its own credit line / financing framework) and the costs of the leasing can be deducted 100 % from the tax as operating expenses.
The financing of the leased asset by the lessor makes the leasing more expensive, in contrast to self-contained financing, since in addition to the basic costs of the leased asset, interest, administration costs, financing expenses and the lessor’s profit must also be borne, but the leasing is liquidity neutral, since the financing is carried out by a third party who merely leases the asset.
In this way, a bank’s own credit line and financing framework does not decrease and, despite indirect financing, there is still as much leeway as before the conclusion of a lease – this makes sense if liquidity reserves are to be held, for example for company expansions or a high short-term capital requirement. Since the leased asset is capitalised by the lessor, the leased asset does not have to be depreciated by the lessee either, which basically results in 3 advantages:
Avoiding depreciation has the effect of shortening the balance sheet, since only the leasing installment has to be accounted for as an operating expense until the end of the leasing term, but not the leased asset until the end of its useful life.
By avoiding depreciation, the equity ratio does not deteriorate as a result of a depreciable asset falling in value.
Whereas in financing only the costs of repayment, e.g. interest, can be written off against tax and the acquisition costs can be written off on a straight-line basis over the depreciation (deduction for wear and tear = depreciation), in leasing the leasing installment can be written off 100 % as an operating expense, even if this payment installment basically consists of repayment, interest costs and allocated costs of the leasing partner.
Since the amount of the leasing installment is also contractually fixed, there is a continuous outflow of liquidity, which can be expected to be fixed – in the case of financing, this outflow of liquidity fluctuates due to the asynchronous repayment of the loan (falling interest portion / rising repayment portion), the possible interest fluctuation, and the depreciation of the financing object.
Problems with vehicle leasing (vehicle leasing)
Leasing is the most popular and still the leader in the field of vehicles, both in the representative sector (company cars) and in the “pay as you earn” segment (self-financing commercial vehicles), even if the proportion of leasing offers in the area of factory equipment or financing of means of production is growing.
Vehicle leasing (vehicle leasing), however, has some pitfalls, especially since, unlike other jurisdictions, there is no independent leasing law in Germany, even though it is precisely regulated what a leasing represents when and what is to be classified as financing or hire-purchase (and thus the advantages of leasing for an entrepreneur are eliminated).
The leasing, similar to the hidden profit distribution in tax law, is not clearly defined, what is possible with a leasing contract and what is not, is therefore not clearly regulated by laws and regulations, they are therefore contracts of their own kind – the problem for the lessee is that he could get 3 differently formulated contracts with 3 different lessors for the same type of leasing (for example a leasing with mileage limitation).
This unclear situation always leads to annoyance and new judgments, which provides some clarity, especially in the area of kilometre leasing or residual value leasing, which is frequently offered in connection with vehicle leasing – because not everything contained in a sui generis contract, even if it is not clearly regulated by law, also corresponds to what is possible, because lessors often try to transfer risks to the lessee as far as possible when leasing a vehicle.
Mileage leasing and residual value leasing
For example, there are still quite frequent attempts to mix kilometre leasing with residual value leasing in a leasing contract – however, both forms of leasing are fundamentally different types of contracts, as there is no transfer of the residual value risk to the lessee in the case of a kilometre leasing, but in the case of the name-giving residual value leasing.
The Federal Supreme Court already decided in its judgment of 9 May 2001 – VIII ZR 208/ 00 that mixing is not permissible. This means: either a kilometre leasing with a residual value risk remaining with the lessor or a leasing with a contractually agreed residual value is offered in which the residual value risk is transferred to the lessee.
What is the residual value (residual value risk)?
The residual value risk is always the biggest disadvantage of a lease, as it is the residual value risk that determines whether a lease is ultimately expensive or not. In contrast to all other factors of a lease, such as administrative costs or the instalment, the residual value risk is hardly calculable. Although the depreciation value and thus the tax residual value of a vehicle can be easily determined, the residual value of a lease refers to the market value at the end of the lease.
This market value can only be calculated in parts, e.g. on the basis of kilometres driven or assumed wear, but the theoretically calculable market value does not have to correspond to the actual market value – should there be a drop in demand for the leased object at the end of the leasing term, the achievable residual value nevertheless drops rapidly, irrespective of the theoretical value.
If a vehicle lease is agreed with a residual value lease, this can therefore mean that at the end of the lease term there may be an additional final instalment which is intended to compensate for the contractually agreed residual value and the actual value (market value).
In the case of kilometre leasing, however, there is no contractual provision for residual value compensation, i.e. the residual value calculated by the lessor represents his entrepreneurial risk – however, kilometre leasing is often more expensive for this reason.
Because: a residual value leasing can be calculated by the transfer of risk, see before, with initially very favorable conditions – in this case the agreed residual value is often set too high in order to reduce the monthly installments and to make the leasing additionally more attractive. For the lessee, this not only creates the risk of the “guaranteed” final instalment, but above all the risk of the additional outflow of liquidity in the form of a compensation payment, which represents an incalculable outflow of liquidity.
Since the residual value of a vehicle in a mileage lease depends on the occasional wear and tear and the number of kilometres driven, this is the imputed risk of the lessor – in other words, has the lessor correctly assessed the achievable market value after kilometres driven or not? Since the financial residual value risk cannot be transferred to the lessee, a direct comparison shows that the residual value risk of the lessee is not the same as the residual value risk of the lessee.