Faced with the constant need to renew their business equipment, companies are looking for alternatives to cash purchases. Financial leasing is gradually emerging as an appropriate response to these challenges. Halfway between traditional leasing and financing formulas, it allows companies to use an asset without immediately bearing the financial burden of its acquisition.
Less well known than leasing, financial leasing deserves attention. Its growing popularity with businesses, particularly SMEs, is testament to its relevance in today's economic landscape. In 2022, financial leasing operations represented an investment volume of almost €14 billion in France.
What is financial leasing?
Financial leasing is a rental financing technique that enables a company to obtain the use of an asset without becoming the owner. In practical terms, it is based on a tripartite mechanism. A company chooses an asset from a supplier. A finance company acquires the asset and then makes it available to the company under a lease agreement for a fixed, irrevocable term.
The fundamental distinguishing feature is that there is no purchase option at the end of the contract. This clearly distinguishes it from leasing, which does offer such an option. At the end of the lease, the lessee must either return the asset or extend the lease.
There are various approaches to its precise definition. According to the Association française des sociétés financières (ASF), financial leasing refers to "transactions without a purchase option in which the lessee chooses the supplier and the asset, and knows and, where appropriate, negotiates the price himself. Contracts are entered into for an irrevocable term, with the rental payments being independent of the use of the equipment".
This form of financing is not considered to be a credit transaction within the meaning of the Monetary and Financial Code. Case law is consistent on this point, as reiterated by the Cour de cassation in its ruling of 2 November 2016. This classification has important implications, particularly in terms of applicable regulations.
The parties involved in the finance lease transaction
There are three main parties involved in a traditional finance lease.
The tenant company is the first link in the chain. It can be any economic entity, whether a commercial company, a sole trader or a self-employed professional. Unlike leasing, which mainly targets businesses, financial leasing has no restrictions on the nature of the lessee, provided that the lessee has the necessary legal capacity.
The supplier plays a decisive role in the operation. It is with the supplier that the company selects the equipment it wants to use. The supplier's technical expertise ensures that the equipment chosen meets the specific needs of the lessee. They often also offer a maintenance service for the duration of the contract.
Finally, the finance company acts as lessor. It buys the goods from the supplier and then leases them back to the company. As this company is not considered to be carrying out a credit transaction, it is not necessarily an approved financial institution. In practice, they are often subsidiaries of banking groups or entities set up by equipment suppliers.
There are two economic variants. In the first, the finance company is involved from the outset. In the second, the company first signs the contract with the supplier, who then transfers the lease to a finance company. This second configuration requires special precautions, as we explain in our article on the conclusion and validity of the finance lease contract.
Differences with other forms of rental financing
Financial leasing belongs to the broader family of lease financing, alongside other similar but distinct mechanisms.
Leasing is the most significant difference and deserves attention. Regulated by articles L. 313-7 et seq. of the French Monetary and Financial Code, it shares the same tripartite logic as financial leasing. However, unlike financial leasing, financial leasing systematically includes a purchase option enabling the lessee to become the owner of the asset at the end of the contract.
Case law emphasises this acquisition purpose. In a ruling dated 10 June 1980, the French Supreme Court described property leasing as a "special legal institution aimed essentially at acquiring ownership of the premises". This possibility of acquiring ownership is totally absent from financial leasing.
Leasing with a purchase option (LOA) also has similarities with finance leasing. This arrangement, which is particularly common in the automotive sector, allows the lessee to purchase the vehicle at a later date. It is closer to leasing than finance leasing.
Finally, hire-purchase is more distinct. In this case, the contract necessarily ends with a transfer of ownership, with no option possible. From the outset, the parties know that the transaction will result in a sale.
These distinctions may seem technical, but they have considerable practical consequences for the rights and obligations of the parties, as explained in our complete guide to financial leasing.
Practical advantages of financial leasing
Financial leasing offers a number of advantages that explain its growing appeal to businesses.
The first obvious benefit is the impact on cash flow. The company benefits immediately from the property without having to pay the full price. Payment is staggered in the form of rents, usually monthly or quarterly. This solution is particularly suitable for expensive equipment such as IT, medical or industrial equipment.
Accounting treatment represents a second significant advantage. Rents are deductible from taxable income. Unlike a conventional investment, the property does not appear as an asset on the balance sheet (unless IFRS standards are applied), which can improve certain financial ratios.
The major advantage of financial leasing is that it can be adapted to rapidly obsolescing assets. It is ideally suited to IT, office automation or technological equipment whose value is rapidly diminishing. At the end of the contract, the company doesn't have to worry about equipment that has become obsolete. It can simply return it and consider a new lease for more recent equipment.
However, there are a number of special legal features to this formula that merit attention, particularly as regards the contractual interdependence between the leasing contract and the maintenance contract that is often associated with it. Our article on performance of the contract and contractual interdependence takes a closer look at this complex issue.
Financial leasing is also of commercial interest to suppliers. It facilitates the sale of their products by offering an integrated financing solution. Immediate payment by the finance company improves their cash flow, while the associated maintenance contract ensures regular income.
Conclusion
Financial leasing is a flexible solution tailored to the needs of modern businesses, particularly for the acquisition of rapidly obsolescing equipment. It differs from leasing in that there is no purchase option, making it a specific financial tool for specific needs.
If you are considering this type of financing for your business, a prior analysis of the legal implications is essential. Our firm can help you secure your finance leases and guide you towards the solution best suited to your situation. Our commercial contracts lawyers offer you personalised support to optimise your financial decisions.
Sources
Code monétaire et financier, articles L. 313-7 to L. 313-11 Code civil, articles 1128 et seq., 1719 et seq. Cour de cassation, Chambre commerciale, 2 November 2016, no. 15-10.274 Association française des sociétés financières (ASF), Annual Report 2022
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