The equipment leasing market exists because of the myriad of financing options faced by several companies.
Equipment leasing has had good runs in several years. This means that many financial organizations have ventured into this field. The challenge to existing as well as new entrants has been how to please the prospective lessee.
As such lessees have been on the receiving end of sweetened deals that make conventional equipment financing unattractive. This means equipment leasing continues to be the best choice for businesses with advantages such as ability to upgrade fast upgrading equipment, tax benefits, equipment maintenance by lessor in certain situations, improved business cash flow position and most importantly flexibility and convenience.
The industry is getting fraught with challenges each and every day. Apart from new entrants, several acquisition and mergers have led to consolidation and creation of big players in the market eroding the price flexibility that was reminiscent of many players. Capital costs for the leasing industry has also been rising eating into the leasing profits.
Perhaps one of the good news for the industry is the fact that the tight economic situation that improving thus encouraging investments in sectors that had stagnated. One such sector is the construction industry that has recorded the most impressive growth. This is because of recovery of the housing situation in America following the sub-prime mortgage crisis. Other industries that have followed suit include manufacturing equipment leasing, transportation, agricultural and industrial equipment leasing.
Major Drivers Of Equipment Leasing Market
Demand for equipment financing in general and leasing in particular has always been driven by growing demand in agricultural, construction and transportation industries among others. Tax legislation coupled with widespread drought in the prior year have combined to propel growth in the agricultural industry which means increase in equipment leases being taken up. The credit environment in the United States is feted to remain favorable for a long period to come. The interest rates, especially in the short term are likely to remain very low, thus driving investments and by extension equipment leases.
Corporate actions are proving to be a big influence in the equipment leasing market. When big corporations make investment moves, other organizations as well as individuals tend to follow suit interpreting investment moves especially by banks and investment conglomerates as possible indicator of the future economic outlook. The economy and economic forces, therefore, still plays a crucial role in the equipment leasing market.
Changes In Equipment Leasing In The Auto Industry
Early leases targeted auto buyers. At that time, and even now, such leases were associated with wealthy buyers who wanted the privilege of using the latest car after a year or two. In fact, lessors focused on auto makers who relied on their employees to drive such lease agreements. Expected favorable economic conditions have greatly supported the waxing popularity of car leasing and will definitely continue into the future. It is estimated that about 40 percent of the sales increase by the end of this year alone will be for car buyers who have just completed their initial leases.
Pending Legislation
Section 467 of the Internal Revenue Service, IRS touches on how to take income and expenses into account for business entities. This has long been a headache when it comes to defining financing and leasing arrangements in the equipment leasing business. Tax treatments for financial and operating leases have been an issue in the industry for long. With each successive review, lessees have been forced to include certain classes of assets into their books. This has forced prospective lessees to more keenly reflect on the effect of lease agreements on the financial position as per their balance sheets.
The effect of these legislation to some extent discouraged lease agreements with prospective investors preferring to buy or enter other financing arrangements. Last year, another review of the lease accounting standards began. Financial Accounting Board already received the recommendations and so has the International Accounting Standards Board.
Other challenges that the equipment industry must undergo include increased difficulty in accessing funding and difficulty in finding high quality employees. Highly trained employees, especially in financial reporting are making even more demands on their employers. Nevertheless, despite these and other foreseen problems, the equipment leasing market is set to increase this year, next year and in the next couple years to come.
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