Modernising by Leasing
By G. C. TRUSWELL"
ALONG with many new management tech- niques, equipment leasing is growing in appeal to British companies. Leasing a large por- tion of one's equipment needs is often considered astute management, particularly in today's diffi- cult credit and taxation climate.
British industry is constantly exhorted to re- equip, and to appraise thoroughly the return to be gained from investment in new equipment projects and in earlier replacement. Clearly, there are many concerns whose growth, sometimes whose very existence, are threatened by owning elderly equipment. Such companies, intent on preserving their existing capital structure, yet unlikely to accumulate the means• to pay for ex- pensive new machines, might consider whether, in their own and the national interest, equip- ment leasing can help them to increase produc- tivity and profitability.
This industry, barely five years old here, is growing fast. The last published accounts of the leading lessor alone showed £18.5 million of equipment purchased and £2.6 million committed to future purchases. Most major finance houses * General Manager, Mercantile Leasing Company Limited. have a leasing subsidiary or division, as have some merchant banks and bank-sponsored insti- tutions. The resources and know-how of these concerns will make possible considerable growth in the amount of equipment acqUired on lease.
The lessor's function is to purchase, in order to lease to a customer, equipment and commer- cial vehicles—the cost, type, and supplier, of which are all specified by that customer. The arrangement is a financial one only, the customer being responsible for normal standards of main- tenance and insurance. There is little limit to the range of equipment leased. It is possible, for example, to lease a complete production line and ancillaries such as handling equipment, de- livery vehicles, and works office machinery, and yet to have a single contract for the whole pro- ject, requiring only one periodic rental payment. The leasing industry thus offers a new and con- venient 'packaging' facility and one which frees the customer from the administrative work of -ownership, such as maintaining depreciation schedules and similar chores.
Equipment-leasing facilities have proved useful recently in the uncertain conditions surrounding the rate and effects of the forthcoming corpora- tion tax, and the question of whether or not investment allowances will be withdrawn in their present form. By using leasing facilities for equipment urgently needed during this confused time, a company at least makes sure of its costs for a fixed period, leaving the lessor to worry about the real value of capital allowances over the next few years under the new taxation system.
• One of the attractive features of using lease
facilities for plant programmes is that the need to raise permanent capital can be obviated, so avoiding weakening the shareholder's position. Today's stock market conditions are hardly pro- SPECTATOR. JULY 23, 1965 pitious for raising money to finance plant re- placement or expansion by equity issues. Until markets improve, leasing can fill a need here. Other advantages claimed for leasing are as follows:
(1) A hedge is provided against inflation, since a lease liability is liquidated over a number of years in terms of tomorrow's money of probably diminishing worth.
(2) Rentals are a wholly tax-deductible expense.
(3) Since no balance-sheet entries are required, important ratios are preserved and perhaps a greater total value of credit is made available to the customer.
(4) Working capital is freed for more profitable use than being tied in fixed, depreciating assets. Leasing provides a budgeting aid to depart-
mental heads whose capital appropriations may not permit outright purchase of cost-saving equipment.
(6) Leasing provides a valuable marketing aid to suppliers of production machinery and busi- ness equipment.
Bearing in mind the popularity of leasing in the United States and other high-productivity countries and the fast-increasing number of equipment leases transacted here in Britain with 'blue chip' companies for amounts ranging from a few hundred to £2 million or more, it would seem advisable for more companies to evaluate carefully the costs, effects and convenience of leasing alongside the more traditional ways- to acquire plant. Whilst at times proper appraisal may point to other methods, there will be many occasions when, in the customer's particular cir- cumstances of finance and taxation, leasing is proved to be the most effective way of financing an equipment replacement or expansion pro- gramme.
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