Leasing glossary

Get acquainted with basic leasing terminology.

LEASING is a specific way of financing investment needs – the renting of production equipment, transport equipment, machines, real property, and other assets, under contractual terms.

However, leasing can´t be seen only as renting, but also as a method for acquiring fixed assets. It is usually a trilateral arrangement between the lessor, the lessee and a vendor. The lessee is the user of the equipment while the lessor is the investor and, over the lease term, the owner of the equipment.

There are two basic types of lease:

Operating lease
Finance lease

The difference between these two is the length of thelease, the transfer of title to the leased asset at lease end, and the purpose of the lease. In both types of lease, however, the lessor owns the leased asset.

OPERATING LEASE is usually characterized as a short-term lease where the lease term is shorter than the useful life of the asset, and the rent, paid in instalments by one lessee, is only a certain proportion of the acquisition price. The lessor expects the costs (including the profit margin) to be paid by next lessees. The lessee, however, has no right to purchase the leased asset. The purpose here is to obtain for a business required assets (sometimes including the operating staff and maintenance), which, however can´t be fully utilized over their entire useful life, and therefore it isn´t worth purchasing them.

FINANCE LEASE is typically a long-term lease of an asset where the lessor passes economically onto the lessee all risks and revenues arising from the operation of the asset. The lease term is virtually identical with the useful life of the leased asset, and the lease payments cover the acquisition price of the leased equipment. Finance leasing is used to acquire particular assets permanently, by paying in instalments.

Depending on the acquisition of title at lease end, there are two types of finance lease

Lease with a lease-end purchase obligation
Lease with a lease-end purchase option

Depending on the nature of instalments, there is a variety of leases. Payments can typically be made as regular and equal, gradually rising (or, alternatively, gradually decreasing), irregular, seasonal, production-cost-related, etc.

Financing through a LOAN involves an immediate transfer of title to the client (it is included in the balance sheet), which meets the conditions for drawing on government subsidies or subsidies from the EU structural funds. This way of financing allows for a complete deduction of VAT on the full acquisition price as soon as the asset has been acquired, which frees capital for other investments, or the refunded VAT can be used for an extra instalment of the loan. The amended Act on Income Tax has established so-called „low-capitalization rules“ and defined a new term „financial costs“, where financial costs are not deductible if they meet at least one of the conditions. This restriction will have the most impact on taxpayers, on their tax burden, quality of their information systems and long-term financial planning. The low-capitalization rules will not be applied if financial costs don´t exceed CZK 1 million. Financing through a loan, however, involves more complicated administration, with stricter creditworthiness requirements being applied – i.e. the client´s ability to repay a loan. Instruments to secure this way of financing include drafts, third-party guarantee, security transfer of title, or liens.

TOTAL LEASING PRICE

This is a sum of all instalments paid over the lease term. A lease instalment consists of the respective proportion of the acquisition cost, the amount of interest, and, in the event of insurance premium included in instalments, instalments and therefore the total leasing price, too, include the premium.

ADMINISTRATION FEE

This is a fee the leasing company invoices to the lessee for lease-related administration costs.

DOWN PAYMENT (INITIAL INCREASED INSTALMENT, UPFRONT PAYMENT)

This amount is determined as a set percentage of the acquisition cost and is usually paid by the lessee at lease onset.

LEASING COEFFICIENT

The leasing koeficient is determined as the quotient between the total leasing price incl. VAT and the leased item´s acquisition price incl. VAT. It indicates the increase in the cost of leasing compared with purchasing the item for cash.

Note.: A number of leasing companies define the leasing coefficient differently. Some companies define this term in such a way as to minimize its value, and present it (wrongly) as evidence how favourable their services are for a potential lessee. Therefore, a more suitable yardstick to measure lease quotations is a comparison between the leasing price and all charges and fees the lessee has to pay to the leasing company.

RESIDUAL VALUE

A leased asset´s residual value is the difference between its acquisition price and its depreciation.

RESALE PRICE

From the point of view of the lessor, this is the price for which the leased asset will be sold to the current lessee at regular lease end (VB Leasing CZ uses a symbolic resale price of CZK 1000,- or EUR 50,-).

TYPES OF FINANCING

When financing an item through a lease, there are two alternatives:

• Financing on the basis of CZK

In this case, lease instalments are paid in CZK and are fixed over the lease.

• Financing on the basis of EUR

In this case, instalments are paid in EUR and are fixed over the lease, too.

LEASED ASSET INSURANCE

A leased asset must always be covered by insurance, whether arranged by the leasing company or by the lessee himself. In such a case, the leasing company requires that compensation be tied up in favour of the leasing company.

Insurance is arranged against all risks (natural hazards, theft, accident, and machinery insurance, if applicable); vehicles and similar movable items must be covered by statutory liability (“third-party insurance“).

Thanks to the large volume of insured assets, VB Leasing CZ offers more favourable terms of insurance on a leased asset than the lessee can usually obtain on his own.

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