Many Russian enterprises lack their own working capital to finance capital investments. Most of them update fixed assets by attracting bank loans or using leasing. IN Lately Many publications have appeared in the specialized press, which prove the advantage of leasing over credit. However, the author of this article draws attention to important nuances that are sometimes forgotten to be taken into account when comparing leasing and credit.
Many Russian enterprises lack their own working capital to finance capital investments. Most of them update fixed assets by attracting bank loans or using leasing. Recently, many publications have appeared in the specialized press, which prove the advantage of leasing over credit 1 . However, the author of this article draws attention to important nuances that are sometimes forgotten to be taken into account when comparing leasing and credit.
In the fall of 2003, the Khlebprom company turned to one of the leasing companies to purchase an automated production line confectionery. The main point of negotiations was determining the amount of remuneration (margin) of the leasing company. In order to prove the acceptability of the established margin, the leasing company's employees provided justification according to which the leasing company's margin was considered as part of the funds saved by the enterprise as a result of the use of leasing, rather than a loan. According to preliminary calculations, the amount of savings obtained from leasing amounted to 3 million rubles. It was planned to pay 1.4 million rubles from this amount as remuneration to the leasing company. Thus, according to the calculations of the leasing company, the net savings of the enterprise amounted to 1.6 million rubles.
However, when determining the amount of savings, an incorrect calculation period was adopted and the procedure for calculating and paying VAT was not taken into account. Having made the necessary adjustments, specialists from OJSC Khlebprom recalculated the amount of savings, which amounted to only 750 thousand rubles. Having proven the validity of the calculations, the leasing company's margin was significantly reduced.
It is obvious that decisions made on the basis of incorrect calculations can lead to financial losses.
Let's take a closer look at the factors that Khlebprom took into account when comparing leasing and credit.
Comparison period
Often, the period for which the economic efficiency of leasing and credit is compared is taken to be the term of the leasing agreement. Such an agreement, as a rule, is concluded for the period of full depreciation of the transferred property. Most enterprises use accelerated depreciation of property when leasing, which allows them to save on income tax during the period of the leasing agreement. However, writing off the entire amount of depreciation in the first years leads to an increase in the tax burden in subsequent periods. Therefore, when comparing the effectiveness of leasing and credit, it is necessary to consider cash flows not for the period of validity of the leasing agreement, but for the entire service life of the acquired fixed assets.
VAT refund accounting
In most cases, companies, when assessing the effectiveness of leasing and credit, limit themselves to comparing income tax payments, the cost of credit resources, credit terms, conditions for leasing and credit, etc. In this case, the different procedures for VAT refunds on purchased property are often not taken into account . This leads to a distortion of the real picture of movement Money and, as a consequence, to incorrect results of the analysis.
If an enterprise acquires equipment or other non-current assets using its own or credit funds, then the VAT included in the price can be refunded or credited in full the next month after they are registered. In practice, reimbursement of overpayment of VAT to the company's current account is made quite rarely and, as a rule, through the courts. Nevertheless, most companies always have a significant amount of VAT payable to the budget for their core activities. By submitting VAT refund on acquired assets, the company has the opportunity to increase its own revolving funds by reducing payments of value added tax to the budget. When using leasing, VAT is charged on the amount of the lease payment and is offset evenly during the term of the leasing agreement, which leads to a decrease in the working capital of the enterprise compared to the option of acquiring property through a loan.
- Personal opinion
Vadim Zaryanich, Head of the Leasing Operations Department at JSB "IBG NIKoil"
Due to the lack of sufficient monthly sales volumes, not all enterprises can offset VAT after a month.
As for the possibility of returning VAT from the tax authorities in full to the current account of the enterprise, in practice this is quite difficult to do. Even if the company sues and it decides to return the VAT, the tax authorities at the place of registration of the enterprise simply may not have the funds to do so. And the situation will return to the usual VAT offset on subsequent receipts of revenue to the company’s accounts.
Impact of the selected financial instrument on working capital
In order to compare the impact of leasing and credit on changes in the working capital of an enterprise, we will highlight cost items, the size of which depends on the chosen financial instrument. These are income tax, property tax, bank interest on a loan, leasing company margin, as well as the amount of VAT refund associated with the acquisition of property.
Having analyzed the changes in the listed items, one can judge the effectiveness of the financial instruments under consideration. The following must be taken into account. When comparing leasing and credit, the so-called “VAT savings” in leasing are often determined, which arises due to an increase in the amount of tax charged on the leasing company’s margin and interest paid. This VAT amount is included in the lease payment and then reduces the VAT debt to the budget. In fact, there is no saving here: in one case, the VAT amount is paid to the leasing company, in the other - to the budget. Therefore, when calculating the impact of VAT reimbursement on the efficiency of leasing, it is necessary to take into account only that part of it that is charged to the amount of depreciation charges as part of leasing payments.
What to choose
In addition to economic efficiency, when choosing between leasing and credit, other factors must be taken into account. For example, the use of credit “worsens” the balance sheet of the enterprise, increasing accounts payable.
- Personal experience
Alexey Myatlik, Leading Project Manager at Globus-Leasing LLC (St. Petersburg)
It should be noted that another significant advantage that an enterprise receives using leasing is the solution to problems associated with the delivery of equipment, customs clearance, insurance, negotiations with suppliers. All this is done by qualified specialists of the leasing company.
Mikhail Okunev, Head of Banking Department of JSCB Metallinvestbank (Moscow)
We should not forget that since January 1, 2003, leasing activities are not licensed. In practice, this means that any legal entity can provide leasing services if this does not contradict the charter of the enterprise. This way, a holding company can take advantage of all the tax advantages of leasing without leaving the leasing company's margin outside the enterprise. For example, one enterprise buys equipment with loan funds and leases it to another enterprise, retaining the advantage of using accelerated depreciation. Some of our clients do just that and turn to the bank not for leasing, but with a request to lend to their own leasing company.
Accurate calculations that take into account all the nuances of the transaction can help the company make right choice between leasing and credit. In addition, such calculations can be used as a weighty argument when discussing more favorable conditions cooperation.
“Income tax benefits make leasing more attractive”
Interview with the boss finance department OJSC MMK-Trans (Moscow) Igor Podtynnikov
Your company used leasing to purchase fixed assets. Why was this particular method of financing chosen?
Indeed, in 2003 we entered into a leasing agreement for the purchase of rolling stock. This was preceded by a thorough analysis of available financing options, including the possibility of using a bank loan for the purchase of fixed assets. We spent comparative analysis, which is based on the calculation of discounted cash flows for two types of financing - credit and leasing. So we estimated two investment project taking into account the current activities of the enterprise. On the one hand, this made it possible to correctly assess the possibility of cash gaps, analyze how much it would cost the company to cover them, and calculate the final financial results. On the other hand, we were able to correctly take into account the procedure for payment and reimbursement of taxes, including VAT. Despite the fact that when using leasing, an enterprise must pay the cost of the services of the leasing company, income tax benefits exceed this amount, which makes leasing more attractive. This was confirmed by the results of comparing the NPV of two projects.
An equally important role was played by the fact that to finance the purchase of rolling stock we needed a loan for six years. Currently, almost no bank provides loans for such a period. We would have to restructure the debt (refinance), which is quite difficult. As a rule, banks are reluctant to issue loans to pay off obligations to other credit institutions. And in most cases, this leads to an increase in the cost of credit resources. No such problems arose when using leasing.
- Is it possible to reduce the amount of leasing payments, and ultimately the total cost of leasing?
This would be possible if leasing companies provided information about what is included in the cost of the lease payment and in what amount. However, unfortunately, such information is disclosed mainly by companies established by large Western banks and a number of large Russian leasing companies. Most companies prefer not to report this, which complicates the process of analysis and decision-making regarding the financing schemes used.
What advice do you have for financial directors of companies who are deciding what financial instrument used to purchase fixed assets?
The main thing to focus on is the use of discounted cash flow techniques for analysis. There is nothing new in this tool, however, practice shows that many are trying to replace it with dubious techniques, which often have serious shortcomings and give incorrect results. To compare projects, it is better to use classical methods - NPV and IRR calculations.
The analysis of leasing operations ends with an assessment of their economic efficiency. At the same time, the amount of nominal and real, actually received income from leasing operations is determined. Income from them represents the amount of rent actually received from tenants.
Let's remember what is included in the rent:
The amount of depreciation of the leased property;
The lessor's income for the services provided (leasing margin);
Insurance premium.
From this diagram it is clear that income from leasing operations is equal to the difference between the amount of rent actually received and the amount of accrued depreciation on the leased property, and the amount of income is the amount of rent actually received. Therefore, to calculate the level of profitability of leasing operations, you can use the following formulas:
Income (from a leasing operation) = the amount of rent actually received - divided by the amount of leased property.
Besides:
Income (from a leasing operation) = the amount of rent actually received - divided by the amount of leased property that is on the balance sheet of the bank (with the participation of a banking structure in the leasing operation) or the enterprise.
For calculation level of profitability of leasing operations
the following formula is used:
Profitability (of a leasing operation) = Income (from a leasing operation) - divided by the amount of accrued depreciation on the leased property.
Profitability of leasing operations
equal to the ratio between the amount of income from leasing operations and the amount of property leased:
Profitability of leasing operations =
the amount of income from leasing operations is divided by the amount of property leased.
A general indicator of the importance of leasing operations in generating profit is the share of income from leasing operations in the total amount of income (Income leasing):
Specific gravity income from leasing operations = the amount of income from leasing operations - divided by the amount of total income of the bank (if a banking structure participates in the leasing operation) or the enterprise.
In addition, in the process of analyzing leasing operations, an indicator such as the feasibility of carrying out these operations is used. The indicator is determined by comparing the share of income (or profit) from leasing operations in the total amount of income (or profit) with the share of leasing operations in the total amount of the balance sheet asset. If the value of the contribution of leasing operations to the overall goal of making a profit is greater than their share in assets, then this indicates the relatively high efficiency of these operations.
The analysis of leasing operations is carried out in dynamics, as well as in comparison with the corresponding period of the previous year.
Let's look at an example of a methodology for analyzing the effectiveness of leasing operations.
ANALYSIS OF THE EFFECTIVENESS OF LEASING OPERATIONS:
|
Indicators |
Base period |
Reporting period |
Absolute deviations |
|
1. Cost of leased property on the balance sheet at the beginning of the period, thousand rubles | |||
|
2. Cost of leased property on the balance sheet at the end of the reporting period, thousand rubles | |||
|
3. Average cost of leased property for the period, thousand thousand rubles (page 1 + row 2): 2 | |||
|
4. Average annual cost of property actually leased, thousand rubles | |||
|
5. Amount of accrued depreciation on leased property, total for the period, thousand rubles | |||
|
6. Amount of rent to be collected from tenants, thousand rubles | |||
|
7. The amount of rent actually received from tenants, thousand rubles | |||
|
8. Income from leasing operations, thousand rubles (page 6 - row 5) | |||
|
9. Profitability of leasing operations (D1), % (page 6: row 4) | |||
|
10. Profitability of leasing operations (D2), % (page 6: row 3) | |||
|
11. Profitability of leasing operations, % ((page 6 - row. 5) : row. 5) | |||
|
12. Profitability of leasing operations, % ((page 6 - row. 5) : row. 4) | |||
|
13. Income, total, thousand rubles | |||
|
14. Share of income from leasing operations in total income, % (page 6: row 14) | |||
|
15. Coefficient of completeness of income generation, % (page 7: row 6) | |||
|
16. Share of profit from leasing operations in income from leasing operations, % (page 8: row 6) |
Leasing margin– 4 percent per annum.
To calculate the amount of lease payments, the annuity formula is used.
P = A * I: T/(1 – 1: (1 + I: T) T* P)
P – amount of lease payments;
A – the cost of the leased property;
P – contract term;
I – leasing interest rate;
T – frequency of rental payments.
In accordance with the conditions we are considering, the company’s expenses for financial leasing are:
P = $9,883
To determine the payment amount adjusted by the residual value, the discount multiplier formula is used, from which:
Taking into account the adjustment for K (residual value factor), the lease payment amount will be equal to $9,869.
Thus, the amount of leasing payments at 1% residual value of the equipment will be 237,856.
Since the first rental payment is made in advance at the time the lessee signs the protocol on acceptance of the equipment, that is, not at the end, but at the beginning of the interest period with quarterly frequency of interest payments, another adjustment is made to the calculation of the payment amount using the formula:
This correction factor is 0.9217.
This means that the company's expenses are reduced by almost 8 percent due to the timing of lease payments.
Using this adjustment factor, the total lease payments are $219,310.
According to existing rules, the enterprise's expenses for obtaining equipment must also include costs that are identical in direction and amount to the credit scheme for purchasing equipment.
Enterprise expenses for customs duties, fees and VAT are taken into account in an agreement with the leasing company that these payments are included in the leasing agreement.
The lessor (leasing company) pays them at the border, and then they are additionally taken into account in lease payments during the year and are paid by the lessee enterprise in excess of the calculated amount of leasing interest on the terms of attracting credit resources for this transaction and receiving the corresponding leasing margin by the lessor. As you can see, both parties (leasing company and lessee) are interested in this scheme.
However, unlike loan costs, the increase in price will be made at a coefficient of 0.04 (leasing margin).
The company's leasing expenses (with payment at the beginning of the quarter), taking into account the costs of customs duties, fees, and value added tax, will amount to $279,042.
Payments are made in equal installments at the beginning of each quarter throughout the lease agreement.
A comparison of the enterprise's expenses when purchasing equipment using credit funds compared to leasing expenses will be as follows:
326,465: 279,042 = 1.170, that is, loan costs exceed leasing costs by 17 percent.
Thus, we can conclude that leasing, as a method of long-term investment, can be quite profitable for an enterprise in comparison with other forms of investment in fixed production assets.
CHAPTER 3. COMPARATIVE ANALYSIS OF LEGAL SUPPORT OF INTERNATIONAL AND RUSSIAN LEASING OPERATIONS
3.1. Regulation of leasing relations by Russian legislation
The purpose of the legal chapter is to analyze the regulations governing relations under an international leasing agreement, as well as to compare international and Russian regulations and draw conclusions about the most significant differences in approaches to regulating international leasing. The relevance of this issue is determined by the fact that, in accordance with the Constitution of the Russian Federation, international legal acts have the highest legal force and their provisions must be taken into account when developing and concluding an international leasing agreement. To achieve this goal, the following tasks will be solved in this chapter:
1. consider the main regulations governing leasing relations in Russian Federation;
2. analyze the most significant provisions of the Federal Law “On Financial Lease (Leasing)”;
3. consider the provisions of the UNIDROIT Convention on International Financial Leasing;
4. based on the comparison, draw conclusions about the difference in approaches to regulating leasing relations according to international and domestic regulatory documents.
Currently, civil regulation of leasing in Russia is carried out by several regulations. First of all, this is the UNIDROIT Convention on International Financial Leasing. Russia acceded to the Convention in accordance with Federal Law No. 16-FZ of February 8, 1998 “On the accession of the Russian Federation to the UNIDROIT Convention on International Financial Leasing.” The UNIDROIT Convention entered into force for the Russian Federation
Next regulatory legal act regulating leasing relations is the Convention of the CIS countries on interstate leasing. This Convention was signed on November 25, 1998, but has not yet been ratified by the State Duma.
The Russian Federation has adopted a number of regulatory documents aimed at regulating leasing:
1. the federal law dated February 8, 1998 No. 16-FZ “On the accession of the Russian Federation to the UNIDROIT Convention on International Financial Leasing”;
2. The Civil Code of the Russian Federation – defines a leasing agreement as a type of rental agreement. Special norms of the Civil Code of the Russian Federation on leasing are applied together with general provisions on leases and obligations;
3. Federal Law of October 29, 1998 No. 164-FZ “On Financial Lease (Leasing)” as amended and supplemented in accordance with the Federal Law of January 29, 2002 No. 10-FZ “On Amendments and Additions to the Federal Law “On Leasing” - defines leasing as a form of investment activity; provides a significant number of customs and tax benefits;
4. Federal Law dated February 25, 1999 N 39-FZ “On investment activities in the Russian Federation carried out in the form of capital investments” (as amended on January 2, 2000 N 22-FZ);
5. Federal Law of July 9, 1999 No. 160-FZ “On Foreign Investments in the Russian Federation” (as amended and supplemented on March 21, July 25, 2002, December 8, 2003);
6. Government resolutions and others regulations regulating the use of leasing in certain industries - establish the procedure for providing state guarantees for leasing operations in certain industries.
Questions about the law applicable to international transactions are determined in accordance with Part Three Civil Code: the rights and obligations of the parties to foreign economic transactions are determined by the law of the country chosen by the parties when making the transaction or by virtue of a subsequent agreement. In the absence of an agreement between the parties on the applicable law, the law of the country where the party who is the lessor in the contract is established or has its main place of business is used.
Federal Law No. 164-FZ “On Leasing” defines leasing as “a type of investment activity for the acquisition of property and its transfer on the basis of a leasing agreement to individuals or legal entities for a certain fee, for certain period and on certain conditions stipulated by the agreement, with the right to purchase the property by the lessee." At the same time, a leasing transaction is defined as "a set of agreements necessary for the implementation of a leasing agreement between the lessor, the lessee and the seller (supplier) of the leased asset." At the same time, the Law excludes land plots and other natural objects, as well as property prohibited for free circulation or for which a special procedure for circulation has been established. Thus, leasing is interpreted as “one of the forms of investment financing.”
Goal: compare methods of acquiring fixed assets and choose the most profitable one. How to proceed: consider the terms of the transaction, compare the costs and benefits of various financing instruments, calculate the effective interest rate.
Credit and leasing are the two most accessible and common ways of acquiring property through debt financing. The conditions for attracting him using these tools are largely similar. In both finance leases and bank loans, the borrower must pay part of the cost of the property—usually 10 to 30 percent—either himself or post a deposit. When attracting bank financing, this is called “participation with own funds”, and when leasing, it is called “advance”. Both the leasing company and the bank will require to insure the property that is the subject of the transaction, which in the first case is the property of the lessor, and in the second, as a rule, acts as collateral.
If we talk about the main expenses, then in both cases they will include payment of the principal debt, interest and bank commissions, since the leasing company will also receive a loan to purchase equipment. However, being, in essence, an intermediary between the bank and the client, the lessor will add its margin to the cost of services.
As for taxation, in the case of concluding a leasing transaction, the company applies an accelerated depreciation rate, thereby reducing the amount and timing of payment of property tax, while when attracting bank financing, fixed assets will be depreciated, reducing the income tax base. When leasing, income tax savings are achieved due to the fact that all payments are included in the cost price. A significant difference between financial leasing and lending is that VAT is charged on leasing payments. And with a loan, payment of the principal, interest and bank commissions is not subject to this tax; it is paid by the borrower when purchasing property and is credited after putting the fixed asset into operation.
Leasing margin and tax effect
Typically, the choice of financing instruments is made based on a simple calculation of costs and the amount of savings in property taxes and income taxes. All other things being equal, preference is given to the cheapest way to attract financial resources. Comparison absolute indicators expenses and tax savings is a simplified approach that does not take into account a number of important points. But the main difficulty when comparing bank lending and financial leasing is that lessors offer their clients only the final payment schedule for consideration and, as a rule, do not disclose the internal cost of financing and the size of the margin that is included in leasing payments. Therefore, the author proposes to determine the most profitable way to purchase property based on the effective interest rate. But first, let’s compare leasing and lending by simply calculating the amount of payments and comparing the tax effect. This is helpful to understand the lease payment structure and tax implications of the two financing options. The initial data are shown in Table 1. They approximately correspond to the average market conditions for bank loans and leasing transactions.
Table 1. Conditions for financing a transaction for the purchase of equipment
| Basic conditions | Credit | Leasing |
| Cost of equipment including VAT, thousand rubles. | 11 800 | |
| VAT, thousand rubles | 1800 | |
| Depreciation group | 5 | |
| Term beneficial use, month | 85 | |
| Repayment of principal | Monthly, in equal installments | – |
| Interest rate, % | 13 | |
| Leasing margin, % | – | 4 |
| Property tax rate, % | 2,2 | |
| Participation with own funds / advance, % | 20 | |
| Financing term, months | 29 | |
| Accelerated depreciation rate | – | 3 |
To simplify calculations, a number of assumptions are made in the conditions:
- the cost of attracting credit resources for the organization and the leasing company is the same;
- The leasing margin is given as an example. In practice, it is usually not disclosed. Often the margin is more than 4–5 percent, especially in retail transactions (for example, financing the purchase of vehicles);
- the advance payment in case of acquisition of fixed assets using credit resources and leasing is the same;
- The loan is repaid by the borrower monthly in equal payments;
- the costs of insuring the leased item are also the same, but in the calculation example they are not taken into account;
- the period was chosen based on the full depreciation of equipment during leasing for 29 months, taking into account the use of an accelerated depreciation coefficient equal to 3. While in practice it is often lower, and for property of the first–third depreciation groups it is not applied at all (in this regard leasing of property belonging to the first–third depreciation groups, is usually more expensive than a bank loan, unless the leasing company receives a discount from the supplier. This is how the marketing ploy “Leasing at 0 percent” develops).
In our calculations, we assume that the lease payment (excluding VAT) is equal to the loan payments, increased by the leasing company’s margin and the amount of property tax (we assume that it is paid by the lessor). In other words, the task comes down to comparing what tax preferences give us and what the leasing margin “takes away”. The following results were obtained (calculations are presented in Tables 2 and 3). Property tax savings in case of purchasing equipment under a leasing scheme during the leasing period will amount to 175 thousand rubles, over 85 months (depreciation period) - 513 thousand rubles. The difference in income tax savings for 29 months will also be in favor of the leasing scheme and will amount to 1212 thousand rubles, and the total effect, taking into account the deduction of the margin, will be 915 thousand rubles. Once the lease agreement expires, there will be no income tax savings. At the same time, depreciation continues to accrue on the loan, and eventually (at the end of the depreciation period) the saving effect will be reduced to 33 thousand rubles.
table 2. Calculation of annual income tax savings for loans and leasing, rub.
| Year | Credit | Leasing | |||||||
| Redemption main debt |
Pay percent |
Depreciation | Tax on property |
Saving tax at a profit ((2 + 3 + 4) × 20%) |
Leasing payment without VAT |
Incl. margin |
Incl. tax on property |
Saving tax at a profit (6 × 20%) |
|
| 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | |
| 1 | 3 906 207 | 994 816 | 1 411 765 | 204 471 | 522 210 | 6 785 630* | 305 986 | 174 483 | 1 357 126 |
| 2 | 3 906 207 | 485 478 | 1 411 765 | 173 412 | 414 131 | 4 029 009 | 149 738 | 83 448 | 805 802 |
| Total in 29 months |
9 440 000 | 1 533 278 | 4 235 294 | 440 971 | 1 241 909 | 12 271 111 | 472 000 | 265 833 | 2 454 222 |
| 3 | – | – | 1 411 765 | 129 412 | 308 235 | – | – | – | – |
| 4 | – | – | 1 411 765 | 98 353 | 302 024 | – | – | – | – |
| 5 | – | – | 1 411 765 | 67 294 | 295 812 | – | – | – | – |
| 6 | – | – | 1 411 765 | 36 235 | 289 600 | – | – | – | – |
| 7 | – | – | 1 411 765 | 6902 | 24 910 | – | – | – | – |
| Total in 85 months |
779 167 | 2 462 489 | 265 833 | 2 454 222 | |||||
*In the first year an advance is included.
It would seem that the benefits of using a leasing scheme are obvious, especially if discounting is applied. But on the other hand, the situation looks somewhat different, because we not only do not take into account the time value of money, but also lose sight of the moment of VAT refund.
table 3. Calculation of the effect of using a leasing scheme in comparison with a loan by year, rub. (simplified approach)
| Year | Tax savings on property Art. 4 Tab. 2 – Art. 8 Tab. 2 |
Tax savings at a profit Art. 9 Tab. 2 – Art. 5 Tab. 2 |
Effect* Art. 10 + Art. 11 – Art. 7 Tab. 2 |
| 10 | 11 | 12 | |
| 1 | 29 988 | 834 916 | 558 917 |
| 2 | 89 963 | 391 671 | 331 896 |
| Total for 29 months. | 175 137 | 1 212 314 | 915 451 |
| 3 | 129 412 | –308 235 | –178 824 |
| 4 | 98 353 | –302 024 | –203 671 |
| 5 | 67 294 | –295 812 | –228 518 |
| 6 | 36 235 | –289 600 | –253 365 |
| 7 | 6902 | –24 910 | –18 008 |
| ... | ... | ... | ... |
| Total for 85 months. | 513 333 | –8267 | 33 067 |
* Total savings on property tax and income tax minus the leasing company's margin.
Construction of cash flow and calculation of EP
Leasing companies usually offer the borrower a final payment schedule for consideration, which includes all costs for purchasing property - bank interest and their own margin, but without details. The financial director of an enterprise can easily compare the conditions for purchasing property in several leasing companies, taking into account payments and the size of the advance, but comparison with a loan offer is difficult for the reasons mentioned above.
To solve this problem, you can use the effective interest rate (EIR). This is a value that allows you to compare different cash flows. It should be noted that EPS is not a rate of return and does not indicate how much interest the borrower will pay for a loan or lease. But with its help you can compare various ways financing and conclude which one is more expensive and which one is cheaper.
When determining the effective interest rate central bank RF previously recommended using financial function Microsoft Excel programs CHISTVNDOH (in the English version - XIRR). The methodology for calculating EPS is given in the Microsoft Excel Help.
Let's compare loans and leasing using the effective interest rate using a conditional example, using data from the same table 1.
To calculate EPS, it is necessary to take into account all income and expenses by type of financing. The procedure is as follows. First, schedules of expenses are drawn up - payments for leasing and loans, taking into account advances and payments for property tax. Then the income is summed up (receiving a loan or paying for equipment with funds from a leasing company), and adjustments are added - income tax savings and VAT refunds. The difference between income and expenses is the cash flow, on the basis of which the effective interest rate is calculated. Next, the Microsoft Excel function NET INDEX is applied, and the results obtained are compared. The financing method with which the effective interest rate is lower is selected. EPS can take completely different values, including negative ones, but it is important for the company to compare them and choose the smallest one.
When calculating the cash flow of the first month (see Table 4), income is taken into account, which means the amount of financing in the amount of 9,440 thousand rubles.
table 4. Calculation of cash flow taking into account savings on income tax and VAT refund, monthly, rub. (extract) *
| Month | Credit | Leasing | |||||
| Expenses borrower |
Saving on tax at a profit |
Monetary flow |
Expenses leasing recipient |
Saving on tax at a profit |
Test (possibly tion) VAT |
Monetary flow |
|
| 1 | –2 360 000 | – | 8 880 000 | –2 360 000 | – | 360 000 | 7 440 000 |
| 2 | –444 608 | 47 348 | –397 261 | –502 930 | 99 035 | 76 718 | –327 176 |
| 3 | –444 161 | 47 258 | –396 903 | –500 630 | 98 646 | 76 367 | –325 617 |
| 4 | –437 221 | 45 870 | –391 351 | –490 669 | 96 957 | 74 848 | –318 864 |
| 5 | –436 418 | 45 710 | –390 708 | –487 949 | 96 496 | 74 433 | –317 020 |
| 6 | –432 486 | 44 923 | –387 563 | –481 538 | 95 410 | 73 455 | –312 673 |
| 7 | –423 136 | 43 053 | –380 083 | –468 734 | 93 239 | 71 502 | –303 992 |
| ... | ... | ... | ... | ... | ... | ... | ... |
| 86 | –108 ** | 23 551 | 23 443 | – | – | – | – |
| 5,72% | Effective interest rate | 4,39% | |||||
* All expenses (for a loan - participation with own funds, repayment of the principal debt, interest, property tax, for leasing - advance payment, lease payment with VAT) are calculated in strict accordance with the payment dates. Receiving a loan - 9440 thousand rubles, offset (reimbursement) of VAT on the loan - 1800 thousand rubles.
** The lease agreement has expired - lease payments are not paid, and in the case of a loan, property tax payments and income tax savings due to depreciation continue, which will be included in the calculation of the effective interest rate.
In the example given, the effective interest rate for cash flows is 5.72 percent for loans and 4.39 percent for leasing. This means that in this case, raising funds from a bank will cost the company slightly more than leasing financing. If the leasing company’s margin is more than 4–5 percent, then a financial lease will be more expensive than a loan. In other words, under given conditions (20% advance, term - 29 months), property leasing is unprofitable if the difference between the interest rate on the loan and the cost of financing from the lessor (lending rate + margin) exceeds 4-5 percent.
Let's change the initial conditions and calculate the effective interest rate to evaluate the same methods of acquiring property belonging to the seventh group with a depreciation period of 181 months. The total funding amount remained the same. As a result of the calculations, the following data were obtained: for bank lending, EPS will be 13.34 percent, for leasing – 12.38 percent. Thus, a finance lease of equipment for 60 months under the newly specified conditions is more profitable than a loan, since the effective interest rate is lower.
Comparison of financing instruments based on the effective rate can be applied to the wide variety of lending and leasing conditions that exist in the market. The calculation results may be different, but there are no standards for the value of EPS, so you need to take into account the ratio of indicators, and not their specific value. In addition, when choosing a method for attracting credit resources, non-financial conditions are also taken into account, such as efficiency, flexibility and customer focus of the lending bank or leasing company.
table 5. Initial data for the purchase of equipment
Attached files
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- Excel file with payment schedules, expense and effective interest rate calculations.xlsx
08:03 18.03.2014
While the real sector continues to groan from interest on ruble loans, things are by no means better in leasing. This is understandable. To provide an item for financial lease for Belarusian rubles, you need to get these rubles from somewhere.
Usually Belarusian rubles are taken not from the Baltic, but from Belarusian banks. Leasing companies use the same credit funds as enterprises in the real sector. Of course, if the lessor - regular customer Belarusian bank, then the latter will “gladly” give him a discount of 1-2%.
But a couple of percent will not make the lot of the lessee any easier. They can generally be hidden by the leasing company’s margin - everyone wants to live. And then at the end the leasing rate will be equal to the loan rate plus 2 or 4% of the leasing company’s margin. Let it be a conditional 42% per annum.
This rate can be found in some leasing companies in Belarus, which are called banking companies.
Let's assume that you are lucky and you find a certain leasing company at a bank that offers you 42% per annum. We take the scales and begin to weigh all the pros and cons.
Leasing for the bravest
Suppose we need to buy a server (such a big, big and very powerful computer) SunFire E2900B, which is offered by Belarusian companies for 1.182 billion rubles including VAT.
For example, we agreed with a leasing company on a 2-year contract and an advance payment of 20%, but here we must remember that the size of this payment can be 25 or even 30%. How do you agree?
We pay the lessor 236.5 million rubles at a time, and then make monthly differentiated payments. In the first month we will pay 78.6 million, the last leasing payment, in two years - only 41 million. But that’s not all.
Classically, the redemption payment will remain 1% of the cost of the equipment - 11.82 million Belarusian rubles.
As a result, after 24 months, the server will become your full property. What will we have as a result, besides outdated computer hardware? The equipment will cost 1.684 billion. The overpayment will be 502 million rubles with a tail, or 42.5%. Go ahead.
Will pseudo-dollars save the world?
If we convert the cost of our SunFire E2900B server into dollars, it will be 121 thousand. The conditions remain the same as for leasing in rubles: 20% advance, 1% residual value, differentiated repayment system. But…
The overpayment will be 25 thousand pseudo-dollars, or 20.2%.
It doesn’t take a financial genius to understand that comparing the 42.5 and 20.2% increase in the cost of a server, a combine, or a molecular meat grinder is pointless. Although leasing offers in Belarusian rubles exist.
If you call a leasing company and insist on leasing in Belarusian rubles, they are unlikely to argue with you. The client's desire is the law. And the equipment will be leased to you.
Only devaluation will help us
What are the arguments in favor of ruble leasing?
Oddly enough, this is an opportunity for the same notorious spasmodic devaluation. Everyday calculation is simple. You take a server worth 121 thousand dollars in February 2014. The price of the equipment in Belarusian rubles is 1.182 billion and is fixed in the contract.
If at the beginning of July this year the Belarusian ruble exchange rate suddenly depreciates by 250%, you will find yourself in the same financial conditions as the company that leased the same server for pseudo-dollars.
If the Belarusian ruble exchange rate behaves the same as in 2011, you will even benefit. But who said that you can enter the same water twice?
Two of the lessee's worst nightmares
True, in all this seemingly simple everyday scheme there are several subtle places.
Read the text of the leasing agreement carefully. If the lessor took out a bank loan at a floating interest rate, this will certainly be reflected in your agreement. The leasing rate, since you still decide to lease in Belarusian rubles, should be fixed.
Let's explain a little. The rate will be fixed if the text of the document states in black and white: “The rate is 42%. And cannot change in the future."
When the agreement is decorated with the phrases: “The rate is equal to 1.79 of the refinancing rate” or “The leasing rate in the first month is 42%, and in subsequent months it is formed by agreement of the parties,” it is better not to waste the ink in your pen on signing such a paper. Then you will have to regret it.
But the horror stories for the lessee do not end there. If, after all, you have signed a contract with a fixed rate, you should not relax. The bank that issued the loan to the leasing company may well ask it to move a little, by 5 - 10%.
“Listen, cousin is the lessor. As a financier - to a financier. Times are tough now, it is prohibited to issue loans, the population does not bear deposits. Let us raise your loan rate by 7%, like that toy factory that went bankrupt the day before yesterday.”
After such words, there is usually a game of nerves: who will win... And if the leasing company raises its paws up, then it lowers them down and dials your phone number: “Hello. Times are tough now..."
However, we admit that this is a completely extreme case. Force Majeure.
The bisector that destroys hopes
Let's return to those lucky ones who, unlike us, entered into a leasing agreement in pseudo-currency.
Let us remind you that a transaction in pseudo-dollars implies that all payments will be made in Belarusian rubles at the rate of the National Bank on the day of payment. This is where the wormhole lies.
Many experts note that devaluation is already underway in Belarus. And it is called a smooth devaluation. If you look closely at the growth of the dollar, it, obeying some kind of magic wand, no less than Harry Potter, is growing with enviable pedantry, by 10 rubles per day of the exchange’s operation. Let's see what happens to the dollar exchange rate with such an “exchange” acceleration in 24 months.
The resulting “bisector” indicates that if events continue to develop as they have for the last six months, in February 2016 the dollar exchange rate will come close to the 15 thousand mark or will increase by 53%.
With this development of events legal entities, who leased the SunFire E2900B server for pseudo-dollars, will pay approximately 1.7 billion Belarusian rubles. We will omit complex multi-page calculations. But if we do not discard errors with exchange rate differences, then the size of leasing payments is the same as in the case of leasing in Belarusian rubles.
And it turns out the same collection of antlers on the wall. Only a profile view.
Therefore, both supporters of transactions in Belarusian rubles and supporters of transactions in pseudo-currency should once again remember that leasing is beneficial not by the size of the rate (although it also matters), but by the possibilities of depreciation and tax benefits.
While writing the article, approximate mathematical models were used that do not take into account certain nuances, such as the need for insurance, possible changes in legislation, bankruptcy of the bank that issued the loan to the leasing company, and the presence of a leap year. However, all these factors are also not taken into account and leasing companies when drawing up payment schedules that they offer to their clients for consideration.
All economic forecasts made in the article are not fully forecasts, since they are used to model situations that may occur with some probability or may not occur at all.
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