The financing of equipment or business property is an essential stage in the life of a company. Among the options available, leasing is often considered. It's a widespread solution, but its mechanisms and legal implications are sometimes unclear to company directors. Is it simply a long-term rental? Is it a form of loan? Understanding exactly what leasing is is essential before making any commitments.
The aim of this article is to demystify leasing. Together we will explore how it works, identify the key players in this triangular operation and distinguish it from other leasing or financing formulas. Finally, we'll look at the benefits that leasing can bring to your business.
What exactly is leasing?
Leasing may seem complex at first glance, but its principle is based on a specific combination of legal elements defined by law. For a contract to qualify as a leasing agreement in the strict sense, particularly one governed by the French Monetary and Financial Code, a number of conditions must be met.
The four pillars of the contract
At the heart of leasing is a four-stage logic that it is useful to understand. First, a specialised company, the lessor, buys an asset (equipment, vehicles, property, etc.) specifically with a view to leasing it to another company, the lessee. This is fundamentally different from a traditional lease, where the lessor already owns the property. The asset is then leased to the lessee for a period of three years. fixed term.
The third essential element is that the contract must include a unilateral undertaking to sell. This means that as soon as the contract is signed, the lessee is entitled to possibility to purchase the property at the end of the lease period, but without being obliged to do so. Finally, the final purchase price, if he decides to exercise this option, must be set taking into account, at least in part, the rental payments already made during the lease period. As specified in article L. 313-7 of the French Monetary and Financial Code for equipment leasing, this link between the rental payments and the final price is a distinctive criterion.
These four elements - purchase to lease, lease, optional promise to sell, and price linked to rental payments - form the legal architecture of professional leasing.
A two-sided contract: leasing and financing
This particular structure gives leasing a dual nature. On the one hand, it is a leasing contract that allows your company to make immediate use of an asset required for its business without bearing the full acquisition cost. You pay periodic rental payments in return for this use.
But on the other hand, and this is its main function, it is a genuine financing operation. The rent you pay does not just cover the use of the property. They also include a portion corresponding to the amortisation of the capital invested by the lessor, as well as the lessor's remuneration for advancing the funds. This is why the final purchase price is often much lower than the market value of the property at the time: a significant proportion has already been "repaid" through the rental payments.
It's not a disguised loan
It is sometimes said that leasing is simply a form of loan where the asset is used as collateral. Legally, this view is inaccurate and can lead to considerable confusion. In a traditional loan, even with a guarantee on an asset (such as a mortgage on a building or a pledge on an item of equipment), the borrower becomes the owner of the asset financed. The guarantee is an accessory to the loan.
The leasing situation is different. The lessor buy the property and remains the sole and entire owner for the duration of the lease. It's not just security; it's the property itself that serves as a security mechanism for the lender. For you, the lessee, this means that you are only a lessee, even if you have the prospect of eventually becoming the owner. This distinction has important legal and accounting consequences, particularly in the event of financial difficulties or disputes.
Who is involved in a leasing transaction?
Unlike a sale or an operating lease, which generally involve two parties, leasing involves a triangular relationship. Understanding the role of each party involved is necessary to grasp the dynamics of the transaction.
The lessor: a financing professional
The lessor is the company that buys the property and leases it back to you. It is not just any company. The usual practice of leasing is considered to be a credit transaction and, as such, comes under the banking monopoly. Under article L. 511-5 of the French Monetary and Financial Code, only companies authorised as credit institutions or finance companies may carry out these transactions in a professional capacity. They are therefore regulated financial players whose business is to finance business investments, not to supply or use the goods themselves. Their perspective is primarily financial.
The lessee: the professional user
It is you, the business (company, craftsman, liberal profession, etc.) who needs the goods for your activity and who is going to use them. You choose the asset and the supplier that meet your needs. You sign the leasing contract with the lessor and agree to pay the lease instalments and comply with the terms and conditions governing the use and maintenance of the asset. You also benefit from the purchase option at the end of the contract.
The supplier: chosen by the lessee
The supplier is the party that sells the asset (equipment, vehicle, building, etc.). A key point is that, in a standard leasing transaction, it is the lessee who selects the supplier and the asset suited to its business. However, the contract of sale is not between you and the supplier, but between the lessee and the supplier. supplier and the lessor. The lessor buys the goods you have chosen, on your instructions. The supplier then usually delivers the asset directly to you, the lessee. Although essential to the operation, the supplier is not a party to the leasing contract itself. This three-way relationship is the keystone of the arrangement.
Leasing, LOA, operating leases: how do you find your way around?
The term leasing Leasing" is often used generically, which can lead to confusion with other leasing options. It is useful to distinguish professional leasing from other options.
Leasing vs Lease with Purchase Option (LOA)
The most frequent confusion concerns the LOA. The structure (lease + purchase option) is similar, but the fundamental difference lies in the destination and the legal framework applicable. Leasing, as defined by the French Monetary and Financial Code, concerns goods used for professional. The LOA, on the other hand, is typically aimed at consumer goods (private cars, household appliances, etc.) intended for the general public. individuals. It is governed by the Consumer Code, which offers specific consumer protection (withdrawal period, formalities of the offer, etc.). The same asset, such as a car, will therefore be covered by leasing if it is used for business purposes, and by LOA if it is for personal use.
Leasing vs. operating leases
Operating leases (sometimes referred to as long-term leases) are similar to finance leases in that they are often offered by financial institutions for professional assets over long periods. The major difference is that there is no promise to sell and therefore no option to buy at the end of the contract. On expiry, the lessee must return the property. This can be an attractive option for rapidly obsolescing assets where final ownership is not desired.
Leasing vs hire purchase
Hire purchase is an older form where the seller (often the manufacturer or a distributor) rents the goods directly to the purchaser, with the rental payments constituting instalments of the price. Ownership is often transferred automatically after the final payment. There is no financial intermediary buying the property to rent it out: the relationship is direct between the seller/lessor and the buyer/lessee. It therefore does not correspond to the triangular structure of leasing. The same applies to property leasing.
What are the concrete benefits for your company?
Leasing is so widespread because it has certain attractions for businesses, although each situation must be analysed on its own merits.
Full financing of the investment
One of the main advantages of leasing is that it enables you to acquire the use of an asset without immediately using a large proportion of your cash flow. Leasing generally finances 100% of the cost of the asset (excluding tax). Unlike a traditional bank loan, which may require a personal contribution, leasing preserves your cash for other needs (working capital, development, etc.). Payment for the investment is spread over the term of the lease via the rental payments.
Tax benefits
The tax treatment of leasing can be advantageous, but with important nuances. As far as VAT is concerned, it is the lessor who initially pays it to the supplier. You, the lessee, then pay it in instalments on each lease payment, which avoids a large cash outflow at the outset, even if it is recoverable at a later date.
Furthermore, leasing payments are in principle considered to be operating expenses and are therefore deductible from your company's taxable income, which reduces your tax base. However, this deductibility is not systematic for all types of asset. For example, in the case of a business, only the part of the rent corresponding to the financial costs is deductible, as the business itself cannot be depreciated. We'll come back to these specific features in a later article. In addition, the tax authorities may reclassify the transaction if the rents are deemed excessive and are intended to conceal unauthorised accelerated depreciation.
Flexibility at the end of the contract
At the end of the irrevocable lease period, leasing generally offers you three options. You can decide to acquire the asset permanently by exercising the purchase option, in return for payment of the residual value set out in the contract. This is often the preferred option if the asset is still performing well and its residual value is low. Second option: you can choose to return the asset to the lessor, which may be appropriate if the equipment has become obsolete or if your needs have changed. Finally, some contracts allow you to renew the lease, often on more advantageous financial terms since the asset has already been largely depreciated. This flexibility allows you to adapt the management of your assets to your company's strategy.
Leasing is therefore a specific financial tool, distinct from loans and operating leases, with its own rules and players. Its advantages, particularly in terms of cash flow and taxation (subject to conditions), can make it an attractive option for financing your business investments.
Leasing is complex, and its implications vary greatly depending on the type of asset being financed and the specific clauses of your contract. To determine whether leasing is the right solution for your project, and to ensure that your commitment is legally secure, a personal analysis by a lawyer is often essential. Contact our firm to discuss your situation and assess your options.
Sources
- Monetary and Financial Code: in particular articles L. 313-7 to L. 313-11, L. 511-5, R. 313-3 et seq.
- Civil Code: articles 1709 et seq (principles of leasing).
- Commercial Code: for certain specific aspects (e.g. insolvency proceedings, leasing of securities).
- Consumer Code: for the distinction with transactions intended for private individuals (LOA).
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