No matter what financial or lending product an organisation chooses, a fee or cost will be involved. Whether it’s for establishing a loan or paying interest, companies must explore the finance options available to them and ensure the fees they’re paying are justified. Leasing companies differentiative themselves by structuring revenue models that ensure the finance agreements (leases) are mutually beneficial — a stark difference to the traditional CAPEX ownership model where the financing of the asset and its use typically aren’t linked to optimise outcomes for both parties. To demystify the leasing process, this article explains how leasing companies make their money and demonstrates how the right leasing and asset finance provider helps companies optimise their asset management. In contrast, buying assets outright may lead to higher upfront costs and long-term financial commitments that may not align with a company’s evolving needs. Learn more about leasing vs buying here.
Leasing companies with operating lease models make money through three streams: lease establishment fees, re-selling returned assets on the secondary market, and extended lease payments. A lessor invests upfront in the devices they lease back to customers, and they legally own them. Due to this investment, and the lessee’s ability to secure favourable funding rates through their relationship with a variety of different funders, this enables lessors to secure assets at advantageous rates. These rates are then passed onto customers through cheaper monthly lease payments that pay off the total cost of the devices.
Lessors can charge a small establishment fee to set up a lease contract. However, the majority of the revenue that leasing companies generate is through on-selling the ex-lease devices from their customer (once they are returned) in a secondary market at current market value.
On-selling ex-lease assets requires diligent market analysis and asset evaluation to ensure the lessor sets competitive lease rates for the devices, while projecting the future asset values accurately at the start of the lease term (which could be three to four years in advance of the devices being sold). This is called the residual value.
If the lessee wishes to extend their lease beyond the original lease term, they can often do so by re-negotiating extended lease payments with the lessor. These new payments will take into account the fact that the residual value of the assets is getting lower as the assets get older, resulting in a lower sale price at the end of the lease when the customer returns them. Alternatively, the customer can negotiate a fair market value price to buy the devices outright from the lessor instead of returning them.
By working with a leasing provider that manages the entire asset lifecycle, companies get peace of mind that the end-of-lifecycle activities are effectively and securely carried out. These activities are costed into the lease payments as well.
It’s in a company’s best interest to ensure its devices are looked after to derive the best return on investment (ROI) possible from using an asset at the peak of its useful life. Similarly, it’s in the lessor’s best interest to get the most value possible out of the used assets.
By returning used devices to the lessor at the end of the lease term, companies are, in essence, creating a circular economy by keeping devices and the resources used to create them in use for as long as possible. Contributing to the circular economy is a core focus for Quadrent, and it’s part of why we prefer that devices be returned at the end of the lease. When a device is returned relatively early in its useful life and it’s in good condition, it can be sold in the secondary market or donated to schools through Quadrent’s Green Lease.
Quadrent established its Quadrent Green Lease to help companies address their environmental, social and corporate governance (ESG) objectives. It also delivers a positive social impact through giving technology a useful second life by donating it to kids who otherwise would not have had access to a laptop for their education. Similarly, the Quadrent Green Lease contributes to the circular economy by ensuring that all parts of the asset lifecycle are managed sustainably. And with asset management and lease accounting software used in conjunction with a Quadrent lease product, companies get all the data they need to make informed decisions and complete IFRS 16 compliance with ease.
When choosing a leasing provider, companies need to pay careful attention to the costs associated with the lease. Look for a provider that has built their revenue model around not only helping companies optimise their asset management and derive the best ROI possible out of the assets but one that also makes a positive social and environmental impact. By securely decommissioning and refurbishing devices so that someone in need can use them for their education, Quadrent’s Green Lease helps companies make a demonstrable commitment to strong ESG practices.
Quadrent works with organisations helping them access assets without sacrificing cash flow and addressing their ESG risk in the process. With a team that has in-depth leasing knowledge and specialised accounting backgrounds, we’ll help your business weather tough economic conditions and get the most value out of your assets.
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