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Are you looking to finance the new furniture for your offices, or do you want to move your business to a larger location? When we need to face new projects or acquisitions that require an investment, there are several options. What is the most appropriate alternative? Renting and leasing are two of the best ways for freelancers and SMEs looking for a comfortable and functional property financing.

What Are Renting and Leasing?

Renting for goods of fast obsolescence

The renting occurs when a company makes the contract to rent a good with another leasing company. It is usually a furniture type, more specifically cars or computer equipment. Its duration usually exceeds the year, but it is not usually longer than 5. As most rental methods are characterized by charging a fixed fee that is usually monthly.

The landlord takes care of the expenses, reviews, and repairs of the property. The advantage is the possibility of deducting all the expense and VAT by reflecting them in the profit and loss account. That’s why it’s a good option for freelancers.

The duration of the contract must not exceed the useful life of the asset since it will become obsolete in less than 5 years if it is a technological good or a vehicle.

The indemnities should be taken into account in case of breaking the contract.

It is reflected in the Profit and Loss account, as an expense.

Many times, it does not give a purchase option.

As they include all the services, sometimes the quotas of a “renting” are noticeably higher than in other types of financing. Like “leasing,” its main advantage is the tax benefits for companies and freelancers since the monthly installments are fully accounted for as expenses. Individuals do not obtain tax advantages.

Leasing, Rent with Option To Purchase.

At the time of acquiring fixed assets for a company, an important economic investment is required since they are high-cost goods. Therefore, there are alternatives such as leasing. It is a leasing company that gives the lessee company real or personal property in exchange for a periodic rent.

It is ideal for entrepreneurs, startups, and SMEs with little initial capital. This usually consists of the amount of the partial amortization of the asset and the financial costs of the operation.

In general, these are long-term processes that involve a final purchase by the customer.

Operative Leasing

In this case, the lessor is not a financial entity but a manufacturer or distributor that rents one of their current assets to a company. This will have to face all maintenance and repair costs since there is usually no option to final purchase. The average period of duration is usually in the medium term, between 1 and 3 years.

It is very similar to renting and can be ideal for companies that must have the latest technology in their equipment. It is also very useful in means of transport without worrying about repairs or technical issues.

When considered a rental, administration costs and corporate taxes are reduced. In addition, it does not amortize the residual value.

An example would be a distribution and distribution company, which offers its employees a means of transportation to work. The tenant wants goods, cars or motorcycles, modern and making a purchase his obsolescence will be very fast. Therefore, it will opt for an operating lease with good lease conditions and a future possibility of buying the property.

Financial Leasing

It deals with the financing of 100% of a good with the right to final purchase. In this case, an entrance fee is not paid, although there are commissions. It is usually used with movable assets (furniture or machinery) or real estate (premises or facilities) a minimum of 2 and 10 years respectively. The purchase option is mandatory, but the lessee may decide not to carry it out if he wishes. The residual value to acquire the property is usually 15% in real estate and a fee in the case of movable property.

It allows a more accelerated amortization than usual. If the client wishes to advance the payments, this point is foreseen in the contract. Therefore, it would obtain a reduction in the quotas and a lower financial cost.

It is accounted for in the asset at a price agreed in the contract and is amortized according to its useful life. The cost of the principal associated with the asset will also be accounted for in the liabilities. As these are fully deductible interests, the amounts paid and interest will be included in the income statement during the year.

Types of Financial Leasing

According to the characteristics of the property, the type of landlord and the procedure that is carried out.

  • Direct: the client asks for a good from the leasing company, and it acquires it from one of its suppliers. And finally, the operation of financing the good with your client / company will be carried out.
  • Indirect: in this case, the initial relationship is established between the client (future tenant) and the supplier of the asset. Once this operation is established, the client goes to the financial entity in search of financing. Finally, the financial entity will buy the property and then rent it to the client.
  • Lease-back or retro leasing: it is a two-part leasing operation. The owner of property contacts a leasing entity and agrees to sell a property. Then a financial leasing contract is signed to recover the ownership of this property.

Main Differences Between Both:

LEASING

RENTING

  • The contract for the acquisition of a good.
  • It does not include some services such as insurance, repairs, maintenance, …
  • It appears as a debt in the liabilities of society.
  • In the case of movable property, the contract requires a minimum duration of 2 years and if it is a 10-year property.
  • Obligatory contract insurance that can cover the costs of repairs and maintenance.
  • A good is used without getting involved in the purchase.
  • Everything necessary for its operation is included in the rental contract.
  • It does not appear in the accounting balance.
  • There is no minimum duration, and it is flexible in terms of terms
  • The leasing company has all the costs of repairs, insurance, and maintenance.
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Real estate agent showing home interior for sale to young couple
Renting a home or apartment can prove tricky and, sometimes, quite complicated. In order to avoid any unwanted circumstances, consider speaking with your real estate agent about these five things before signing a contract:

1. Houses that are Without Furniture look Larger

When a house does not have furniture, it appears bigger than it really is. Therefore, always take the measurements of the house in order to make sure that you get what you are looking for. Buyers often fail to achieve a sense of how much furniture they will be able to fit into a house. Beware of being cheated by spending too much money on something that will not fulfill your requirements.

 2. Ask for any Technical Problems 

Technical problems are often costly and may damage your electrical appliances. Before deciding to rent, make sure that you ask about any technical problems in the house and get them fixed before moving in. Technical issues may increase your utility bill as they increase the voltage used by electrical appliances.

3. Maintenance Policy  

Gated communities often have a policy that the residents are required to pay a maintenance fee to either the property owner or the management bodies of the household. To avoid conflicts later, make sure that you contact the affiliated personnel who manage your maintenance fee.

Decide what to do in the case when major repairs are required in the household. You do not want to end up getting involved in unnecessary issues that are time-consuming and draining your pocket book.

4. Leasing Verbal Tenancy

Different types of tenancies exist which determine the obligations and rights of the tenant and property owner. They differ from one to another depending on the agreement that is made between the tenant and the landlord.

Rentals that are without a lease are known as monthly-based tenancies or the tenancies that are taken at will.  They last only until the rent is paid. Every month these verbal tenancies change.

5. Terminating Tenancy

As many state laws treat verbal rental agreements as short-term leases that are renewable, each lease is terminated immediately at the end of the lease period. If the rent is paid on a monthly basis, both parties, the tenant and the property owner, have the right to terminate the lease with only a month notice. Taking a step like this is beneficial for the landlords as it saves them money and time.

Often, tenants are able to terminate their leases for which they have to inform the landlord 30-31 days before they plan to leave, i.e. a notice period of one month.

If the owner of the property wants to terminate the lease in less time than the notice that was required, they are supposed to follow the eviction procedures that may vary from state to state.

After making sure that you have considered all of these points with your real estate agent, always take into consideration the laws of the state you are residing in. 

Examples of Laws in Different States

1. Alabama
  • Maximum Security Deposit: The amount equal to a month’s rent
  • The deadline for returning the security deposit: 35 days

2. Kentucky

  • Maximum Security deposit: No statute
  • The deadline for returning the security deposit: 30 Days

3.  Ohio

  • Maximum security deposits: No specification
  • The deadline for returning the security deposit: 30 days after moving out

4. Oklahoma

  • Maximum Security Deposit: No specification
  • Deadline for returning the security deposit: 30 days

Check out America's Best Bookkeepers

About Complete Controller® – America’s Bookkeeping Experts Complete Controller is the Nation’s Leader in virtual accounting, providing services to businesses and households alike. Utilizing Complete Controller’s technology, clients gain access to a cloud-hosted desktop where their entire team and tax accountant may access the QuickBooks file and critical financial documents in an efficient and secure environment. Complete Controller’s team of  US based accounting professionals are certified QuickBooksTMProAdvisor’s providing bookkeeping and controller services including training, full or partial-service bookkeeping, cash-flow management, budgeting and forecasting, vendor and receivables management, process and controls advisement, and customized reporting. Offering flat rate pricing, Complete Controller is the most cost effective expert accounting solution for business, family office, trusts, and households of any size or complexity.