Leasing: the affordable alternative
The option of leasing – financial leasing, to be exact – has been provided locally by the Caribbean Leasing Company Ltd (CLCL), since 2001.
A subsidiary of the Business Development Company, its main focus is the provision of lease financing for equipment and machinery to assist in the overall development of the business sectors of the Caribbean.
In the simplest terms, leasing is the process whereby an individual or firm (a lessee) pays a rent to another entity (a lessor) for the economic use of capital goods such as machinery or any other type of equipment. Leasing allows businesses the opportunity to purchase an asset, once the business is able to prove that it can repay the lease and meet the monthly rentals. The asset then forms the collateral for the lease financing facility, which represents a shift away from collateral based lending to cash flow lending.
Often, banks will not lend money against only the asset to be purchased.
Banks usually require additional collateral, such as real estate etc, from the borrower.
However, with a financial lease only the asset is taken as collateral; as such, it is possible to access up to 70-90 per cent financing (based on risk) for investment in equipment and working capital.
Since companies may not necessarily have access to collateral to secure bank financing on a regular basis, leasing provides a means by which companies can access equipment without having to put a significant amount of resources out of pocket. Companies can, therefore, expand effectively through leasing as they need not burden themselves with huge debts while they operate.
With this option, interest rates can be lower than that of other financial Institutions even though the rate charged is based on the risk. Payment terms are fixed and therefore do not vary with fluctuations in interest rates.
At the macro level, leasing can also assist in national development by increasing the competitiveness of the business sector. As a financial tool, it does this by allowing companies to access the latest technology and equipment available with minimum outlay. Access to the most advanced production methods and processes means that companies experience much higher levels of efficiency and productivity (and hence profitability) at earlier stages of their development, than if they had attempted to access bank financing.
The aggregate effect of companies in the non-energy sector utilizing lease financing within the local economy, means that the sector can become more competitive and generate more employment. Enhanced production from this sector can then drive Gross Domestic Product (GDP) growth, resulting in improved standards of living nationally.
Therefore, in a nutshell, leasing can be seen as essential for development simply because it provides an easy way for companies to access financing. This not only enables businesses to be more productive, but positions them more favourably in terms of global competitiveness. The enhanced success of the business sector can then facilitate economic diversification as companies are able to offer more products and services to consumers. Leasing can thus be seen as a powerful tool in the process of development. A financial lease is the epitome of borrowing efficiency.