WHAT IS AN OPERATING

RENTAL?


An operating rental is a cost-effective way of allowing a client the use of an asset without having to outlay the full purchase price upfront. This allows the client to retain cash for his working capital needs.

 

A Rental Agreement allows you as the client:

 

  • The means to structure a payment plan to suit your cash-flow requirements.

 

  • Upgrade your equipment and keep up to date with the latest technology.

 

  • Avoid time consuming administration such as fixed asset register and depreciation schedules.

 

  • To keep your Long Term borrowings down, as rentals are reflected as an operating expense on your Income Statement and not on your Balance Sheet, thereby not affecting your Company’s gearing and credit worthyness.

 

  • To claim VAT back on your monthly rentals.

 

  • To enable urgent CAPEX investment purchases even when there is no CAPEX budget available.

 

  • To decrease tax the liability on Company profit

 

 

 

FEATURES AND ADVANTAGES OF A RENTAL TO THE CLIENT

 

BUDGET

 

1.1        Rental payments can be structured to accommodate budgetary restrictions / financial constraints.

1.2        Rental helps you, the customer, to cater for and improve your cash flow.

1.3        You don’t have to have a big budget to buy it, only pay the monthly rental.

2.1        Rentals are 100% tax deductible as an operating expense, therefore minimizing income tax on P.B.T

 

2. TAX/VAT Obligations.

 

2.2        VAT is not capitalized upfront but rather paid monthly with each rental.

2.3        VAT on the rental will be regarded as input VAT and may be claimed against any output VAT Collected.

 

3. DEPOSIT/CREDIT

 

3.1        No deposit is required, thus reducing the client’s capital outlay.

3.2        By using rental as apposed to other funding methods, you will not be using your credit facility at your own bank.

 

4. BALANCE SHEET

 

4.1 Rentals are reflected as an operating expense in the Income Statement and not on the balance sheet

4.2 No bank can offer “off balance sheet” finance direct to clients.

 

5. UPGRADE

 

Providing flexibility to change or add as technology improves, or as the site or business expands.

 

6. RENTAL OPTIONS

 

6.1        Rentals can be structured around the clients particular cash flow requirements including stepped

payments.

6.2        Escalation options of 0%, 10%, 12% and 15% per anum are available.

6.3        Monthly rentals can be reduced by use of escalation options, therefore easing the client’s immediate cash flow.

6.4        Terms are 36, 48, and 60 months.

 

7. ADMINISTRATION

 

7.1  Rentals are collected from the client’s bank account via debit order, therefore reducing the administration burden.

 

8. OTHER

 

8.1        You, the customer, can now enjoy the full use of equipment at the lowest cost possible

8.2        You can now enjoy the best, top of the range equipment by renting.

8.3        We is here to offer solutions for all your financing needs.

8.4        Should equipment that is rented by the customer be used operationally as a core business service  , the  equipment or product  indirectly ‘pays” for itself and the abovementioned advantages derived from the rental, automatically increases the overall business value of the Organisation.

 

 

COMPARISON BETWEEN INSTALMENT SALES

RENTALS AND LEASE

 

 

INSTALMENT SALE

RENTAL

LEASE

DEFINITION

An agreement whereby the bank purchases a durable asset on behalf of the client, who pay for the item together with finance charges over an agreed period.

A Contractual obligation conveying the right to use an asset for an agreed period of time in return for a series of payments by the user.

An Agreement whereby the bank allows the client the use of the asset for a specified period, in return for a series of cash payments, which include finance charges, and transfers substantially all the risk and rewards associated with ownership.

DEPOSIT/INITIAL PAYMENT

Negotiable

An initial rental may be negotiated.

Negotiable.

OWNERSHIP

Secured by the bank. After final payment, owner passes to credit receiver.

The hirer retains ownership.

Owned by the Bank. Ownership can be obtained at the end of the lease agreement at a price lower than market related prices.

ASSETS

Such as airplanes, plant machinery and equipment and truck fleets.

Such as aeroplanes, plant machinery and equipment, generally non income generating.

Such as aeroplanes, plant machinery and equipment, generally non income generating.

REPAYMENTS

Flexible– monthly/quarterly/half yearly/annual/structured payment.

Flexible–monthly/quarterly/half-yearly/annual/structured payments to suit cash flow.

Flexible–monthly/quarterly/half-yearly/annual/structured payments.

PERIOD

Non-statutory limit. Generally 60 months maximum.

Generally 60 Months maximum or the depreciable life of the asset.

Non-statutory limit. Generally 60 months maximum.

VAT

Capitalized and included in the agreement. The client may in most cases claim an input credit in respect of VAT.

Payable on each monthly rental. The client may claim an input credit in respect of VAT.

Capitalized and included in the agreement. The client may in most cases claim an input credit in respect of VAT.

TAXATION

Business users: Wear and tear and interest deductible from taxable income.

Business users: Total ex VAT rental can be deducted from income statement.

(Operating expense)

Business users: Total rental can be deducted from income.

END OF AGREEMENT

Ownership passes automatically to client.

Assets are returned to the Rentor. A secondary rental may be taken out or negotiations for ownership conducted.

Assets can be returned to the bank, purchased, sold to third party or a secondary lease may be taken out.

TAX LIABILITY

On termination there are no income tax implications, however, on the disposal of the asset there may be a re-coupement where the sales proceeds exceed the depreciation value of the asset.

Applicable when:

The hirer obtains ownership.

Applicable when: The lessee obtains ownership at below market/ deemed value.

Proceeds on disposal are rebated to lessee.

Lease extended at a rental less than 10%, deemed value.

BALANCE SHEET IMPLICATIONS

Asset is capitalized and reflected on balance sheet.

No long-term liability is reflected. As a rental is a contingent liability.

Asset is capitalized according to GAAP and the liability is reflected on balance sheet.

RESIDUAL VALUE/ BALLOON PAYMENTS

Can be negotiated with bank dependent on the type of asset purchased.

Can be negotiated.

Can be negotiated with Bank Dependent on the type asset purchased.

INTEREST RATE

Market related (negotiable). Aim to provide products that enable customers to manage their own interest rate risk. Linked to Bank Prime Overdraft Rate or BA Rate. Fixed rate and shortly able to offer interest rate derivatives.

Market related (negotiable). Aim to provide products that enable customers to manage their own interest rate risk.

Linked to the Prime Overdraft Rat or derivates. Dependent on client, amount and asset.

Market related (negotiable) Aim to provide products that enable customers to manage their own interest rate risk. Linked to the Prime Overdraft Rate or BA rate. Fixed rate and shortly able to offer interest rate derivatives.

 

 

 

 

                   
 
                   
   

 

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