Credit lease or leasing in English is a particular financing technique that offers an alternative to credit. It is aimed at companies but can also interest individuals.
We also speak of a rental contract with option to purchase (LOA). Its practice is reserved for commercial enterprises approved as credit institutions. Most of them are subsidiaries of banks or car manufacturers.
How it works
The principle is relatively simple: the customer ( credit-taker ) pays throughout the contract rents (fees) to a company ( credit-lessor ) to benefit from the immediate use of a property which he can become the owner of at a agreed price at the end of the contract.
It is therefore above all a rental transaction comprising a unilateral promise to sell.
Good to know: at the end of the contract, the two parties can also agree to a renewal.
Capital goods and tools
Furniture leasing generally concerns capital goods or tooling material. In practice, the company selects the products it needs (car, tools, furniture, equipment, etc.) and then contacts a financial company specializing in Leasing. The latter then buys the property and then rents it to the company.
Industrial or commercial buildings
Real estate leasing can adapt to the real estate needs of the business. The latter pays rent to occupy its premises (warehouses, offices, goodwill) over an agreed period without a lease contract.
At the end, the company becomes the owner of the premises on the basis of the residual value. Unlike a mortgage, it is not essential to have a personal contribution.
As the rental contract is not subject to the status of commercial leases, the tenant company cannot therefore terminate at the end of each three-year period. The contract must therefore include an early termination clause.
Important: if the duration exceeds 12 years, the contract must be subject to land advertising.
Rental of the commercial premises to a third party by the lessee
On June 10, 1980, the Court of Cassation confirmed a decision of a Court of Appeal which granted in the context of a real estate finance lease the possibility of the lessee to rent the commercial premises. However, the commercial lease cannot be opposed to the lessor.
Clearly, if the lessee does not exercise the purchase option, the tenant cannot remain in place.
Early termination clause
The contract must include an early termination clause and provide for the financial conditions under which it is exercised.
The Court of Cassation, dated April 27, 1988 confirmed that in the event of early termination, the lessor could not demand payment of the remaining rents. The compensation must therefore not be assimilated to a penal clause and must be less than the capital remaining due.
Advantages and disadvantages
For the lender
Financial institutions particularly appreciate leasing operations because by becoming an owner, they benefit from a foolproof guarantee in the event of default by their client.
On commercial premises
This is an opportunity for the company that wishes to acquire its commercial premises to do so even if it does not have any personal contribution (most often required by the banks as part of a classic property finance) or guarantees necessary for this type of operation. Even if this acquisition is carried out in two stages, it therefore offers the possibility of becoming an owner.
For companies that have sufficient funds to finance all or part of the acquisition, real estate leasing offers the possibility of preserving their cash flow or allocating it to other investments. Finally, since real estate operations in the field of commercial premises are not free of risks, this is an opportunity for the company to transfer this risk to the lessor.
On the movable part
Much appreciated in the IT field, furniture leasing makes it possible to benefit from equipment that is always at the cutting edge of progress
Rents are considered as operating expenses and therefore deducted in full from the accounting result. In addition, the market value of the property is not included in the company’s balance sheet. Note also that it is possible to negotiate an increased first rent. This possibility increases the deductible portion over a financial year.
However, depreciation and loan interest do not come into deduction, it is necessary to properly assess the interest that such a practice has for the company.
The other mechanisms
The sale and leaseback mechanism
This is a reverse mechanism since it consists for a business owner of its professional premises in reselling the property to a lessor. The lease-back mechanism thus makes it possible to improve its cash flow while continuing to occupy the premises which it can moreover buy back in the context of a leasing contract. Last significant advantage, the gain realized following a sale and leaseback operation benefits from a total exemption.
The principle is the same as during a lease-back operation and applies more particularly to movable property. The lessee then leases the equipment to other user customers.
- Definition of back-to-back