Introduction to Rental Financing
Rental financing has been created to make it possible for you to expand your systems as required, without affecting your budgets and cash flow. It offers the greatest possible tax advantages and caters for the current high inflation rate in the economy. Financing packages are created depending on your requirements to cater for cash flow and budget constraints, rent-free periods, residual values and bullet payments.
Rental Agreement Features
Equipment Rental
Rentals give clients full use of the equipment over a period of time at a monthly cost, but do not confer right of ownership. Our intention is to ensure you enjoy full use of equipment at the lowest cost possible.
Contract Terms
A five-year agreement is the norm, however 36- and 48-month periods are also available.
Tax
Rentals are 100% tax deductible as an operating expense. Your budget is therefore not affected by capital expenditure (capex) constraints and allows you flexibility to upgrade within the rental period, or within a fiscal year. Value Added Tax (VAT) is not capitalised on the agreements but paid monthly on the rental. This provides valuable savings at the time of upgrading as VAT is only paid for the period the equipment is in use.
Escalation
Normally an escalation rate of approximately the expected rate of inflation is built into the rental structure. This takes future rentals into account by considering inflation (which erodes the value of money over time), keeping the payment equal in real terms measured today.
Accounting
Rental is an operating expense and is not reflected on the balance sheet in any way. Rather it is shown in the income and expenditure statement and noted in the accounts as a commitment.
Advantages of Rental as Apposed to Cash
Rental
- May escalate instalments to suit user
- VAT payable monthly
- Interest calculated on cash prices before VAT
- 100% tax deductible monthly
- Operating expenses in the income statement
- No capex approval required
- No deposit is necessary
- Recoupment tax avoided
- Off balance sheet
- Control / contact with user base is secured
- Improves equity ratio, current ratio and return on assets ratio on financial ratio
- Option to upgrade equipment is available free of additional VAT on original equipment and if the same supplier is used for new equipment, a preferential discounted figure is given effectively this is a substantially higher “trade-in” amount
Cash
- Capital outlay up-front reduces working capital
- VAT payable up-front
- Interest lost over period as cash – that could have enjoyed an interest return of its own – is paid up-front
- Deductible by depreciation via balance sheet annually
- Appears in the financials as an asset
- Capex approval required for purchase of equipment
- Capital outlay up-front
- N/A
- On balance sheet
- Control of user base is lost
- Has to be capitalised and most ratios effected
- Very little or no value is attached to trade in or second-hand equipment after a period of about 2 years and therefore capital would effectively be lost when new equipment is purchased as no return on capital would be recognised
Would you like a rental agreement? Contact us today!