How can it help me?
A finance lease can help you to compete effectively for export contracts by enabling your overseas buyer to buy your capital equipment.
What is it?
A finance lease—also called a capital lease or lease purchase agreement—involves you selling the capital equipment you manufacture to an Australian or overseas leasing company, which then leases the equipment to an overseas buyer. It enables the overseas buyer to use the equipment over the term of the lease agreement and purchase the equipment at the end of the lease term.
How does it work?
The main steps in a finance lease are:
- Your overseas buyer advises that they wish to buy equipment from you, using a finance lease to finance the purchase.
- You and/or your buyer choose a leasing company to buy your equipment. It may be a specialised entity or a financial institution that provides leasing facilities for the purchase of goods.
- You deliver the equipment to your buyer (the lessee), who can control and use the asset. The leasing company (the lessor) pays you for it. The lessor remains the legal owner of the equipment for the lease term. The lessee or the lessor can be responsible for maintaining and insuring the equipment.
- The lessee pays rent by instalments throughout the lease term, allowing the lessor to recover the cost of buying the asset and earn interest on the instalments.
- At the end of the lease, the lessee has the option to become the owner of the equipment by paying the lessor the residual value—the value of the equipment at that time.
The diagram below shows the main steps in a typical finance lease.
Notes to diagram
- You enter into a contract to sell your equipment to a leasing company.
- The leasing company and your overseas buyer (the lessee) enter into a lease contract.
- You deliver the equipment to the lessee.
- The leasing company pays you for the equipment.
- The lessee makes lease payments to the leasing company throughout the lease term, and at the end of the lease pays the residual value to become the owner of the equipment.
What are the pros and cons?
|May give you a competitive advantage if a potential buyer needs new capital equipment but lacks sufficient funds to buy it outright
||Legal and tax regimes and accounting standards for finance leases are different in each country. These rules and regulations are important in determining whether or not leasing is financially beneficial |
|Eliminates your risk of non-payment and assists your cash flow, as you receive full payment from the lessor upfront
||If you sell your equipment to a leasing company in a foreign currency, you are exposed to exchange risk from when you agree the sale price to when you receive payment|
|Requires little or no down payment from the customer and the equipment itself is usually security for the lessor
|In some circumstances, may be the only viable option for your buyer—for example, if the authorities in the buyer’s country prohibit the outright purchase of certain types of foreign manufactured equipment
What costs are involved?
- Your overseas customer bears the cost of renting your equipment through a third-party lease agreement. The cost depends on factors such as the term of the lease, value of the equipment and the leasing company’s risk assessment of your customer and the importing country.
- You may need to reach agreement with the buyer on who will pay costs such as freight charges for the equipment and transit insurance.
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