Strategically managing costs is crucial in all businesses, but particularly in partnership models where a range of needs and stakeholders need to be balanced. In the current environment, firms that operate under partnership models need effective ways to reduce financial risk without jeopardising productivity and the level of resources that staff and clients have become accustomed to in the past.
Leasing business assets is a key way in which a partnership can strategically manage its costs and financial risk while providing a range of benefits to the partnership group and broader firm.
Why lease when a firm can own its assets?
In a partnership model, many factors need to be balanced and addressed, including:
- ensuring the partnership and your people are engaged and motivated to perform;
- providing the best resources for people to deliver work;
- having the latest technology to give clients an exceptional experience; and
- establishing strong financial foundations for the partnership now and into the future.
While it's challenging to balance and address these factors, it's not impossible, and options such as asset leasing can form part of the solution. For example, leasing business assets with a shorter useful life, such as IT equipment, provides organisations with the latest technology without jeopardising the financial position of a firm and its partnership.
The benefits of leasing for partnership business models
Most firms that operate under a partnership model have secured a favourable credit position and strong banking and finance networks through many years of hard work. As a result, borrowing through traditional finance channels may be the natural inclination for firms upgrading or acquiring business assets. While your firm may have access to competitive rates through these channels, capital expenditure and new credit facilities result in an unbalanced financial burden to partnerships.
A loan burdens a partnership with debt. In contrast, leasing spreads costs over the useful life of the assets, ensuring future partners cover the firm's resourcing obligations as well. This ensures that cost and risk are spread evenly, as the financial burden is the same today as it will be throughout the remainder of the lease term.
Under the IFRS16 accounting standard, the general assumption is that all leases go on a firm's balance sheet. Consequently, the interest and depreciation charged are higher from the outset and similar in cost to a traditional credit facility. Under IFRS 16, the liability is based on the time value of money, not the value of the asset.
The IFRS 16 low-value exemption provides further benefits for firms that want greater control over their capital and expenditure. Business assets under $10,000 are eligible for the low-value exemption and can be fully depreciated down. As a result, leases on low-value assets become an operational cost and eligible for off-balance sheet accounting treatment. This provides firm's with increased clarity over their operating costs while leaving capacity in the balance sheet for larger investments in the firm.
The benefits of leasing for the wider firm
Beyond the benefits to strategically managing finances within a partnership model, asset leasing has a range of other benefits for the broader firm, including:
- greater cash flow control;
- eliminating end of term ownership responsibilities;
- reducing costs;
- providing the latest technology; and
- stronger capital and debt management.
Greater cash flow control
The key benefit of a lease is that you eliminate a large upfront capital investment. Instead, your cash flow is spread over the lease term. It may even be possible to structure your payments to match the cash flow benefits you expect from the asset. For example, if you’re investing in a project that won’t generate income for 12 months, you may be able to delay rental payments until the end of the first year.
Eliminating end-of-term ownership responsibilities
Leasing helps firms avoid onerous end-of-term ownership responsibilities and costs, particularly around the disposal of obsolete assets in accordance with government regulations. For example, a lessor can assist with onsite decommissioning, packaging, transportation, data wiping and remarketing costs, leaving your firm with time to focus on its core activities.
Reducing costs
Operating-style leases are generally more cost-effective than financing at corporate rates. This is because the lease can be structured so the lessor contributes their capital to invest in its assessment of the market value of the asset at the end of the lease, called the “residual position”.
By factoring in the residual position of an asset, the lessor can discount the cost of lease payments, effectively providing much lower interest rates than traditional channels. In some cases, the interest rate can be 0%.
The graph below details how leasing can be a more cost-effective option for your firm. With a lease through Quadrent, all of your expenses associated with the asset are spread evenly across the lease term. The organisation doesn't pay interest, and other costs such as maintenance are included in the recurring lease payment.
Providing the latest technology
Regular replacement of older assets with the latest technology increases productivity and profitability. Newer equipment is typically more efficient and cost-effective to run, providing tangible benefits to the bottom line. Further, ensuring your firm has the latest technology infrastructure, ensures your people can work effectively no matter where they're based, which has become particularly important throughout the COVID-19 pandemic.
Stronger capital and debt management
For some businesses, asset leasing may be a strategic tool to manage the firm's balance sheet proactively. With many leasing costs eligible for off-balance sheet accounting treatment, the firm can use the capacity in its balance sheet for larger investments such as opportunistic acquisitions. The savings from leasing business assets can also be used for activities such as paying down existing debt, buying back outstanding shares, or securing other business-critical facilities or projects.
Explore how leasing business assets
Leasing business assets is an excellent alternative to upfront capital expenditure, especially in a partnership model. This alternative will address financial risks and ensure your firm always has the resources it needs to succeed in a competitive marketplace.
Contact us today if you would like to understand more about how your firm can make sure it has the assets it needs while maintaining a strong financial position and meeting your people's and client's needs.
Download our white paper to learn more about leasing business assets and how to introduce this solution to your organisation effectively.
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