Advantages of Leasing as One of the Financing Resources of SMEs

Assoc. Prof. Dr. Sefer Gümüş

Deputy Dean of Faculty of Business Administration, Haliç University

DEFINITION of SME

Economical facts consisting of production, consumption and services are carried out by businesses of various in functions and sizes. These organizations that make up the dynamic power of economy may be working in the field of agriculture, manufacture or similar sectors at different scales.

There is no definition of SME, which is valid in all countries.

Definitions regarding the size may differ from country to country or from institution to institution in the same country. International institutions are working to eliminate differences in definition of SMEs.

Contribution of SMEs to Economy

In our country, approximately 99% of the businesses in the manufacturing industry are businesses that employ 250 or fewer people and have characteristics on an SME. These businesses provide about 63% of employment and 30% of surplus value.

When we look into the share of SMEs in our exportation, we can say that 8% of the total exportation is assumed to be done by SMEs although there is no absolute data. This shows how important SMEs are in the economy of the country.

However, contribution of SMEs to economy is not limited with this. It is often stated that SMEs bring dynamism to economy. SMEs require less capital at the establishment phase. They can be easily established anywhere because of their small structures, and produce enough to meet the local demands while creating demand for low quality work power.

SMEs also make an important contribution to training of low quality work power and as a result improve work power quality in general.

Owing to their flexible structures, SMEs can harmonize with changing economical conditions, and help overcome economical crisis more easily and keep cost of crisis low as a consequence.

Financing Problem of SMEs

Financing problem is one of the most important problems that is faced by SMEs in our country. SMEs, beginning from establishment phase, experience financing difficulties in investment, supply of raw material, administration, marketing and technology renewal.

As SMEs have shortages in owned sources, they are obliged to use outside resources, which cause problems because of economical instability, inefficient institutionalization, bureaucratic barriers and high interest rates.

LEASINGH - FINANCIAL RENTING

Leasing literally means “renting. Leasing or financial renting is a contemporary financing method which enables an investment property to be owned by the lessor company while the usage right is given to the lessee until its ownership is finally handed over to the lessee company over the decided value at the end of the contracted period.

According to the leasing law “Leasing Contract” is a contract that requires the lessor leave the possesion of a property that is bought from a third entity or provided in another way upon the demand and choice of the lessee to be used in any way in exchange for the lease value with the condition that it can not be cancelled for a certain period.

The lessee, chooses or decides on the needed investment property or equipment, appeals to the lessor company who does the necessary research work, and then they sign the leasing contract. The equipment or property is handed over to the lessee after the sale agreement (maintenance and after sale services included) is signed with the selling company. The lessee pays the lease according to the conditions for the period defined in the agreement, leasing is finalized in terms of the agreement in the end of the agreed period.

Advantages of Leasing

Leasing, which is extensively used in medium-term financing of investments all over the world, provides great advantages in meeting the daily growing business capital need of organizations in comparison to other financing alternatives

100% Financing for Your Projects; Leasing can finance 100% of your project with the possibilities it provides and your self resources remain untouched as a result,
You do not touch your self owned sources; Thus, your size of self owned sources and credits do not shrink and is reflected positively in the balance sheets and financial,
Balance of Debts / Self Owned Sources is not affected; Because leasing is a procedure which remains out of balance sheets, your company’s balance of debts / self owned sources is not affected, credit worthiness does not decrease,
Flexible Lease Payment Plan; You can plan your cash flow with flexible lease payments suitable to your funds flow,
All of your lease payments are recorded as expense; You gain cooperation tax or income tax cuts because you will record all your lease invoices, including principal capital and interest, as your expenses,
You can make use of your subsidies; You can make use of your subsidy by having the Lessor Company use the subsidy for your subsidized investments,
You can buy the leased property if you wish; You can buy the leased property at a symbolic price at the end of the term,
Secured conditions against inflation; By leasing, you enjoy secured conditions of the fixed leasing period and fixed lease payments and thus have your measures against inflation,
You can meet your lease payments with your investments; You can pay your lease with the profits you will gain from your investments,
VAT Advantage; The VAT rate, which is normally 17%, comes down to 1% for the leased investment properties and to 8% in purchase of commercial vehicles,

LEASING TYPES

l- Operational Leasing: In this type of leasing, leasing is done with a contract for a shorter period than that is necessary for covering the economical life of the leased property. In this case, the contract can be cancelled with an advance notice given in the formerly decided periods, although it covers a certain period.

2- Financial / Capital Leasing: Long period leasing type which gives the economical control of the leased machinery – establishment to the lessee making him the actual owner although legally the lessor has the possession.

2.a Financial / Capital Leasing Without Imports; This is possible only when the assets subject to leasing can be obtained within the country. After having chosen the investment asset and defining the price and submission conditions, the lessee signs an agreement with the seller, appeals to the lessor company. The lessor company carries out necessary research and submits a tender. The contract is signed, the lessor company pays the value of the property to the seller, and the property is submitted to the lessee. The lessee pays the lease for the period defined in the contract, and in the end either gets possession of the property or returns the property to the lessor and ends the contract or continues the contract under better conditions.

2.b Financial / Capital Leasing With Imports; Even though this is the methodically the same with the former one, the only difference is that the seller firm supplying the asset is out of the country. There are full amortization or partial amortization contracts of financial / capital leasing.

3- Sale and Leaseback: A company’s selling an economical value of it to a lessor company and then leasing it back under certain conditions, generally in the periods when financing needs are high.

Direct leasing, leverage leasing, gross leasing, net leasing, domestic leasing and international leasing are other types of leasing.

Some basic advantages of financial leasing, which has found acceptance and application fields both in our country and all over the world in the recent years and brought some benefits to the parties and to the economy of the country, are as follows:

Increases financing offers necessary for new investments while lowering financing costs.
Leasing gives a country the possibility of providing finance without having to get foreign loans.
Is a solution to the problem of financing investment requirement in a country where there is not enough capital accumulation.
As a more secure alternative, lowers economical and political risks when foreign capital is hesitant to arrive due to risks.
Enables effective and flexible use of financing resources, contributes to capital accumulation by canalizing these resources to production.
Along with policies aiming to avoid inflation, brings investment possibilities that eliminate negative effects on investments and unemployment.
Strengthens advertisement and marketing possibilities of manufacturer firms.
Provides ease of suitable financing especially for the benefit of small and medium sized enterprises, at times when medium and long term investment possibilities are limited.
Because the assets provided through leasing are not in possession of the company, they do not appear on the balance sheet, as a result owned sources / debts rate of the company will be high to increase its credit worthiness.
Because lease payments are defined according to the conditions of the lessee, the payments can be planned in accordance with the profit gained through the leased equipment, and this brings the lessee an advantage of cash flow.
Financing of the whole investment project is possible.
Makes it possible to cut all the expense from the tax base