Andy Milsom, Head of Training and Partner Development at BNP Paribas Leasing Solutions, discusses the rising popularity in leasing.
Whether as private individuals, or making investment decisions on the part of our businesses, we are always confronted with a choice.
Do we wait until we have the cash available to acquire assets that will provide immediate benefits? Or do we enter into some form of finance agreement that provides immediate funding for our chosen investment?
As the benefits of investing in new equipment become clearer, such as cars which are less damaging to the environment and have greater fuel economy than their predecessors, or technology which can significantly reduce the ?total cost of ownership?, there are strong reasons to avoid delaying investment decisions. Many businesses find that finance agreements allow them to invest in new business equipment as and when the need arises.
Effectively there are two types of finance agreement:
- A loan where an individual or business borrows money to buy an asset.
- A leasing agreement where an individual or business simply pays to use an asset for as long as it is required.
Popularity in leasing
The UK car industry illustrates a trend which now seems to be taking hold, and serves as an example of the increasing popularity of leasing. Let?s look at some facts…
The UK economy is predicted to grow between 2% and 3% during 2014, which represents a significant improvement on the previous three years. Despite this relatively low period of growth, it is significant that new car sales are on course to increase by 8.1% during the current year and the UK car industry has now increased sales (year on year) for a record 29th consecutive month ? by any measure the car industry is booming. Why?
The answer is simply a perfect combination of new technology, which provides immediate benefits, and innovative finance products which provide the means of acquisition.
Historically, individuals have always chosen to own their cars and the finance products used were designed to ensure that title would pass once all payments had been made. In these circumstances customers are required to make payments that cover the purchase price of the vehicle together with interest charges.
The big change recently has been the development of finance products which do not involve customers owning the vehicle at the end of term. Personal contract hire simply involves a customer renting a car for three or four years and then handing it back, leaving them free to negotiate a new deal for a new vehicle. The total amount paid does not need to cover the purchase price of the vehicle and therefore monthly installments tend to be significantly lower than with traditional credit agreements.
Pay for what you use
Beyond cars, the concept of paying for use rather than ownership can be seen in other areas. Two year contracts that provide both equipment and call and data charges are the normal method of acquiring smartphones.
Although it is possible to buy a phone and take out a SIM-only deal, the vast majority of consumers want the flexibility to change their equipment after two years and have no great desire to actually own the phone.
In the world of music, the 40 million current users of the commercial music streaming service, Spotify, have taken a decision that they do not need to own a music collection to enjoy listening to their favourite tracks.
The key change behind these developments is that people are increasingly recognising that there is little benefit in actually owning an increasing number of items – they simply want use of them for a period, after which they have the flexibility to change. Many businesses have always adopted this thought process and leasing continues to remain a very attractive option for financing capital expenditure. The increasingly wider recognition that the key requirement is use rather than ownership will undoubtedly accelerate this growing trend.