no limits: vehicles, real estate, but also machines, can be financed by installment plan. – © photosoup- stock.Adobe.Com
- Corporate finance needs long-term planning
Installment plan? The term itself often causes confusion. Which to choose: rent or buy? If at all, he is known from the private real estate sector. In the commercial context, the volume of hire-purchase transactions is growing steadily; according to the ifo institute, it even rose by 10.4 percent to an impressive 8.5 billion euros in 2017. However, many companies, especially small and medium-sized ones, are not aware of this topic.
Interest is correspondingly low. The chamber of handicrafts for munich and upper bavaria can also only state on request that Installment plan as a financing option in business consulting "no role at all" plays. randolf steinhoff of cologne-based abcfinance gmbh emphasizes that lease-purchase can be an alternative. As head of department, Steinhoff is responsible for direct leasing, but in certain cases he also advises his customers to use installment plan. We have summarized when this is and what interested parties should basically look out for in ten questions and answers.
1. What exactly does installment plan mean?
Installment plan is practically a middle ground between renting, leasing and buying. Whereby between a so-called real installment plan and a "fake" one the difference between a lease-purchase and a. In the case of a genuine installment plan, a lease contract concluded in the amount that is appropriate to the case. Later, the rental object can be acquired at any time, whereby the exercise of the purchase option at the discretion of the tenant. The purchase price is then first determined and the rent paid to date is taken into account.
2. What is the case with the "non-genuine" form of financing? Installment plan different?
Here are purchase intention and purchase price fixed from the outset. The lease-purchase is therefore considered a purchase contract and the economic ownership is already transferred to the buyer at this point in time. In the commercial sector, the "non-genuine" leasing installment plan is almost always the rule, because it is precisely the fact that the goods – unlike, for example, with the leasing – The property, which becomes the economic property of the buyer, can be used in a targeted manner in the financing mix.
Caution: in the literature on hire-purchase, the terms are sometimes confused and the term "non-genuine hire-purchase" is used is sometimes used exclusively in a negative sense, for example, when the landlord is working with disproportionately high rates or dubious contractual conditions. In fact, however, it is only a special form of installment plan, which has certain economic and tax implications (see item 8).
3. What are the advantages of installment plan??
Installment plan offers fixed rates and allows the purchase without equity. This can be a very sensible alternative, for example, if subsidy programs are linked to a purchase. In addition, special depreciation and investment deductions can result in tax deferral effects (see also item 8 on the tax aspect). This form of financing is also suitable when the credit line spared is to be used or is earmarked for other acquisitions.
The advantages over leasing are the automatic transfer of ownership at the end of the lease term and the shorter lease term. The terms of lease financing are regulated by law. The lease-purchase term can be up to 100 percent of the normal useful life of the asset.
4. What can be financed through installment plan?
Basically, explains steinhoff, there are no restrictions: "neither in terms of objects and sizes – nor in terms of law or in terms of business sense."Machinery any size can be financed by installment plan, as can vehicles or commercial real estate.
5. How payments are made with installment plan?
The total costs are spread over a longer period of time, while the installments remain the same. Buyers therefore have a calculable size. Nevertheless, you can remain flexible by, for example, keeping the installments low at first and agreeing on a higher final installment. It is also possible to include an option, after which the final payment is divided into further constant payments installment payments can be converted in a constant amount.
6. How much will the rent payments be deducted??
This is a matter of negotiation. experts stress, however, that at least 80 percent should be charged, otherwise it becomes too expensive to.
7. Does the current interest rate situation influence the decision for or against lease purchase??
according to steinhoff, the current interest rate situation has the same effect on lease-purchase financing as other types of financing. The advantage, however, is that with installment plan – as with leasing – there is no need to worry about a all costs are known at the beginning of the financing and be transparent. There is no need to fear an increase in interest rates after the conclusion of a hire-purchase agreement.
8. What are the tax effects of lease-purchase??
In the case of a genuine lease-purchase, the lessor is the legal and economic owner until the time the option is exercised, and must transfer ownership of the asset to the lessee Balance sheet asset. The rent paid up to the exercise of the purchase option is operating income for the landlord and represents operating expenses dar.
In the case of "non-genuine installment plan the buyer accounts for the asset, with the rental payments as purchase price instalments to be split into an interest and principal part.
Attention: before concluding a hire-purchase agreement, it is important to note that the vat the total amount of rent to be paid at the beginning and at once. The value added expensive can be refunded by the tax office after application. However, this can take four to six weeks. for this time you will have to give up the corresponding liquidity.
9. Are there points that speak against an installment plan?
Especially in the real estate sector, installment plan often has the stigma of being a expensive and the offered objects otherwise difficult to sell. Experts do not generally confirm this – and certainly not for the commercial sector. However, it is always important to weigh up the advantages and disadvantages carefully. If the selling price is higher than the usual market value, caution is advised in any case.
Another aspect: since in the case of lease-purchase, the object must be immediately shown in the balance sheet of the purchasing company, sinks in general the equity rate. This in turn could lower the rating. If you want to avoid this, leasing is the better alternative.
10. What are the risks that must be taken into account?
When renting it is important to look for a reputable and solvent partner. If the contractual partner becomes insolvent during the term, the completion of the sale may be jeopardized and the installments paid over the years are lost.
