18 February 2019

Leasing, renting or a business loan, what is the best choice?

You already have a business, but do not know how to finance your further operating costs, investments or future plans? We have provided an overview of the 3 main options for you.

1. Leasing
> What is it?

Financial leasing is a form of credit in which a leasing company buys goods for your company. Then you rent the goods from the leasing company. While the other party remains the ‘legal owner’, you become the ‘economic owner’ of the goods. This means that you can use the goods, but also that you are responsible for maintenance, insurance and repairs. In exchange for their use, you pay a fixed fee for an agreed period.

When the agreement expires, you can choose whether to buy the goods or not. There are 3 possible situations:

  1. With an on-balance lease you can buy the goods at a favourable price which is set in the contract in advance. The purchase price is limited to maximum 15% of the investment value of the goods.
  2. With an off-balance lease you can buy the goods at a purchase price that is at least 16% of the investment value. The purchase price can also be higher and equal to the market value of the goods.
  3. Or you could opt for a rental formula in which, technically, there would be no purchase option at the end of the contract.
> What is it used for?

In theory, you can take out a financial lease for all movable or immovable assets: from a car to a wind turbine, from an office to an excavator. Usually it is used for assets with a minimum value of €10,000 (ex. VAT).

How do I record this in my accounts?

Depending on the chosen formula, the lease invoices are either entered on your balance sheet each month (in the case of an on-balance lease), or they are only recorded in the statement of profit and loss (in the case of an off-balance lease). In other words, an on-balance lease increases your company's debt ratio, while an off-balance lease does not. Invoices are considered capital repayments with interest in the case of an on-balance lease; and are fully tax-deductible as an expense in the case of an off-balance lease and with a rental formula.

So only an on-balance lease and not an off-balance lease, a rental or an operational lease will allow you to depreciate the leased asset. The depreciation rate depends on the usual useful life of the asset and not on the length of the contract.

2. Operational leasing or renting
> What is it?

Operational leasing or renting works according to the same principle as financial leasing. However, there are some differences:

  • With renting, the leasing company remains both the legal and economic owner. This means that the leasing company is responsible for the maintenance, repair and insurance of the goods.
  • No purchase option is provided for an operational lease.
  • The accounting process is the same as for an off-balance lease (see above): the invoices are entered directly as costs in the statement of profit and loss. The amounts do not appear on your company’s balance sheet.
> What is it used for?

As with financial leasing, you can, in principle, enter into a rental agreement for any movable or immovable property. Choosing financial leasing or renting depends mainly on your personal preferences, your financial situation and your choice to include services such as maintenance and insurance in your agreement.

Benefits of leasing and renting
  • You do not have to make any large investments, leasing is in principle 100% financing. 

  • Spreading payments: you can make monthly or quarterly payments.

  • You do not have to contribute your own capital or pay an advance.

  • Financial leasing and renting are generally granted more flexibly than business loans.

  • The leasing company pays the full VAT at the start. You pay this to the leasing company periodically with the rent.

  • The off-balance lease and operational lease formulas show no liabilities on the balance sheet.

  • With financial leasing you can become the owner of the goods at the end of the contract.

  • You can transfer a contract to another company within or outside the group of companies to which the lessee belongs. This makes this form of financing very flexible.

  • A tailor-made formula is possible.

3. Business loan
> What is it?

A business loan is a means of financing business purchases, such as business premises, computer equipment, vehicles, etc. You can use the money to finance the start-up of your company or make new investments.

> What are the most important characteristics?
  • The term corresponds to the economic life of an investment. For a computer, for example, it will be 3 years, for a building it will be 15 to 20 years.
  • You can choose between a fixed or variable interest rate.
  • The amount you can borrow depends, among other things, on your investment plan and the resources you invest personally.
  • In consultation you can opt for a degressive repayment (you pay less as you move towards the end) or a fixed monthly repayment.
What about the accounting?

The investment credit must be accounted for on the balance sheet. Both the costs and the interests are tax deductible from your corporation tax.

Advantages of a business loan
  • Spreading payments: payments are paid monthly, quarterly, half-yearly or annually.

  • You can withdraw the amount all at once or in instalments.

  • You are using government support measures. It encourages business investments.

  • In most cases, your credit is available within 48 hours.

  • You can protect your family or company with an Outstanding Balance Insurance. That way they are protected in the event of your death. 

Need financing for your project?