What is leasing?

Leasing today is a product that is becoming more and more popular as a form of financing the activities of many companies. However, taking into account how it grows from year to year, one may be tempted to argue that it will continue to dynamically expand its scope of impact on other areas. It is therefore worth learning what leasing really is, what types of leasing are and what the leasing market in Poland looks like.

What is leasing?

In simple terms, a lease is an arrangement between two entities, where one party is the lessor or financier and the other is the lessee or lessee. The task of the former is to transfer to the other party the right to use a particular item for a specific period of time (clearly stated in the contract). In addition, the lessee undertakes to pay installments for the use of this item, called leasing installments.

The Polish legal system regulates this method of financing in the Civil Code in Art. 7091-70918. One can find there guidelines as to the conditions that must be met in order to conclude such an agreement. It is also the only legal act that deals with the standardisation of leasing and therefore each party, whether the lessor or lessee, must comply with the rules contained therein. Looking for information about leasing, you can find frequent comparisons to loans, because it is basically an alternative form of financing the company's activity. Both loans and leases are usually granted either by banks or leasing companies, which not only specialize in this, but also often offer a comparison of many offers, which makes it possible for an entrepreneur to choose the most advantageous option for himself. It happens that sometimes the loan is more profitable, and sometimes leasing. This is strongly dependent, inter alia, on which form of financing will help to obtain appropriate financial balance sheet indicators.

Types of leasing

The different categories into which leasing is divided can be distinguished. However, two of them are by far the most popular and include: operating lease and financial lease (capital lease). There are many aspects that differ from one form of leasing, but financial leasing is by far the most similar to credit. However, there is also one property that distinguishes credit from leasing: the latter will always concern only assets and never cash. What interests the lessee the most is, of course, interest. Most often they are determined on the basis of a variable interest rate.

Financial leasing

This type of financing is completely different than operational and in the most important aspects: tax and accounting. After signing the lease agreement, the lessee becomes the owner of the object specified therein, which results in its recording on the side of fixed assets (assets) in the financial protocol. As a result, the lessee is entitled to write off and thus depreciate the object, which leads to increased costs. Moreover, in this variant of leasing, only interest can be considered as eligible tax deductible costs reducing the tax base.

The end date of this type of leasing is usually not strictly defined, but usually a capital lease is concluded for a period of time that is roughly regarded as being necessary for the total consumption of the object (mainly six to sixty months). At the same time of leasing, initial rent is not included in the tax deductible costs (usually from 10 to even 40% of the value specified in the contract). In general, it applies to measures that are taxed between 0 and 7% or are completely exempt from taxation. When the contract expires, the lessee may purchase the product only on terms that have been agreed in advance.

Operating leasing

The most common period of concluding an operating lease is from 24 months to even 60 months. It should be noted, however, that it is impossible to conclude an agreement with this form of financing, if its duration is shorter than 40% of the time which was normatively defined as necessary for depreciation of a given asset. It has the basic advantage that it allows not only to include all leasing instalments, but also initial rent (often high), in the eligible costs of obtaining revenues. This makes this form of leasing very attractive for entrepreneurs. On the other hand, the beneficiary does not become the owner of the fixed asset of the contract, which means that it cannot be classified as an asset. However, when the contract comes to an end, the lessee is faced with the possibility of purchasing the item for an amount that includes not only the final value, but also its increase in VAT.