How Leasing Works: A Simple and Practical Guide
By: John | Date Posted: January 5, 2023
There are several formats for running a car rental business. One of the financial models applicable to a car rental company is leasing. This model is gaining more and more popularity due to its benefits for both the lessor and the lessee. In our material, we will talk about the advantages and features of leasing for a car rental business.
What is leasing, and how does it work?
Leasing is a type of financial service, the essence of which is to provide the right to use property and buy it eventually. There are usually three parties involved in leasing:
- The seller is the one who sells their property to the lessor.
- The lessor is the one who buys property from the seller and leases it.
- The lessee is the one who receives the right to use the property and subsequently buy it from the lessor.
Let us take a look at the principle of leasing using an example of a company that rents a car according to this financial model. Basically, such a company receives requests from the lessees for the purchase of specific cars. You can buy such cars from the seller at wholesale prices and then rent them out. But in addition to the rent, the lessee is also obliged to pay lease payments. Thanks to this, in the future, they will have the right to buy the car they leased from you.
At the same time, you receive a stable income from renting a car and can use the profit to scale your business and purchase other cars. Car leasing companies usually use special automotive leasing software. This allows you to streamline all documentation and tax payments, track the status of all rented cars, synchronize work between departments, control the company’s budget and its overall profitability.
The essence of leasing in the modern economy and its classification
Today, leasing is a popular model for acquiring many types of property. The reason for this is the advantages that each party receives.
The advantages of the leasing model for the lessee are as follows:
- even distribution of the company’s budget,
- possibility to recover VAT from lease payments,
- inclusion of leasing payments in the company’s expenses,
- ability to use the accelerated depreciation mechanism.
Benefits for the seller:
- constant sale of property, including wholesale,
- more favorable conditions compared to the usual sale,
- no need for transaction support.
Benefits for the lessor:
- possibility to resell or release the property,
- protection of interests due to the fact that the property is on the balance sheet of the leasing company,
- simplification of work due to special leasing software,
- availability of favorable conditions for wholesale purchases.
What property can be leased and what cannot
It is important to know that not everything can be leased. Typically, this model is used to pay for non-consumable property, such as cars. For a business like car rental, leasing is the best option. A more efficient operation of such a company can be made by using car rental and leasing software.
In addition, equipment can be leased – from office equipment to complex industrial systems. It is also beneficial to lease real estate, especially if you have a potential client who is ready to buy it in the future. However, leasing is not applicable for raw materials, building materials, and food products.
Leasing and taxes: what they are and what can be refunded
If you are considering leasing a property, you will first need to familiarize yourself with the taxes associated with this financial model. Each of them has its own characteristics:
- Income tax directly depends on the size of the payment and is paid by the lessee. The leasing payment can be included in the company’s expenses, so the higher the payment, the lower the income tax.
- VAT is the tax that the lessee can reimburse this if they have leased property for activities that are already subject to VAT. In this case, you, as the lessor, need to provide the lessee with an invoice for payment.
- Property tax — if the car is still on the balance sheet of your company, you will need to pay it, even if the car is leased.
- Transport tax is paid by the party that registered the car.
Leasing is a fairly profitable and convenient financial model applicable to many business areas. It is especially beneficial to lease property if you are engaged in car rental and at the same time use special leasing software. With this payment model, you can earn a steady income and use it to grow your car leasing business in the future.
Thank you for reading!