As businesses grow, many have found difficulties in accessing cheap and long-term sources of financing. This even becomes more difficult for small and medium enterprises (SMEs) that don’t have collateral to access commercial bank loans, besides such businesses are not registered as corporate companies, meaning that they can not make valid contracts with institutional lenders. Whereas company income statements and balance sheets may show positive signs, it’s on rare occasions that small businesses can have sufficient inflows to fund all their business demands. The constrains to having enough savings forces businesses to look for other forms of financing in order to build a sound asset base, which forms this back ground that one can advice the SMEs to take advantage of leasing property. This will help them in having possession working capital and long term assets. Leasing is the right to use or occupy personal property or real property given by a lessor to another person (lesser) for a fixed or indefinite period of time, whereby the lessee obtains exclusive possession of the property in return for paying the lessor a fixed or determinable consideration (payment). However it’s also important to understand the difference between a lease and a purchase contract since it’s sometimes being confused by some people in certain given businesses. When you buy, you pay for the entire cost of the asset. You typically make a down payment, pay sales taxes in cash or roll them into your loan, and pay an interest rate determined by your loan company, based on your credit history. You make your first payment a month after you sign your contract. Later, you may decide to sell or trade the asset for its depreciated resale value. When you lease, you pay for only a portion of the asset cost, which is the part that you “use up” during the time you are using it. You have the option of not making a down payment, you pay sales tax only on your monthly payments, and you pay a financial rate, called money factor, which is similar to the interest on a loan.You may also be required to pay fees and possibly a security deposit that you don’t pay when you buy. You make your first payment at the time you sign your contract for the month ahead. At the lease-end, you may either return the vehicle, or purchase it for its depreciated resale value. Emmanuel Hategeka the secretary general of Private Sector Federation (PSF) believes that as a way of availing alternative mechanisms to traditional lending that requires collateral, most Rwandan business people lack, leasing is the answer. “Leasing is a financing mechanism that allows a business (Lessee) to use an asset owned by another (the lessor) in exchange for specified periodic payments without necessarily assuming ownership of the Asset,” says Hategeka. The private sector boss recognises there are a number of benefits from this source of finance but however says that if it is to cause an impact to the business community positively in Rwanda, some issues must be addressed. “The tax law should provide for lessors being allowed to claim capital allowances as the lessees should claim the rentals as an expense,” he says. He adds that, in order to attract international lessors that could bring competitiveness to the sector certain tax concessions need to be addressed he cited capital allowances for lessor as being one of them. “The Income Tax Act should explicitly allow the deduction of expenditure incurred by a lessee in the case of a lease or similar transaction in accordance with leasing rules issued under the Act,” Hategeka explains. According to Hannington Namara the marketing and communications manager in BCR, since they started leasing in March last year, market response has been quite good given the fact that it is just a new concept to the business community in Rwanda. “Leasing is indeed a good way of financing because businesses with no capital machinery are given an opportunity to acquire the equipment,” he adds. Leasing has no effect on the balance sheet of the company because it is neither treated as a loan or liability but considered as an expense which offers a tax incentive to the company. Namara also adds that leasing is a cheap way of financing business and it puts into consideration time value of money. It should be understood that leasing does not only offer an alternative of accessing long term finances, but it also offers an alternative to investment. It is right to invest but it’s also equally important to cover risk or diversify risk on investment. This therefore calls for insurance of the leased property. Ends
