overview of benefits
Why Rent?
Many people believe that a rental solution is more expensive than an outright purchase. This feeling is even stronger in cases where the useful life of hardware and software is expected to exceed the rental period. This is a non-truth. The truth is that due to the rapid advances and breakthroughs in technology, most companies following this conventional way of thinking are faced with old equipment and very restrictive capital expenditure budgets. In short, most companies lack the budget to buy new and up to date equipment. This has a negative impact on their value and performance.
In 1965, Gordon Moore (the co-founder of Intel) stated, “the speed of an average processor will double every 24 months”. This statement and is now known as Moore’s law. In 2006, a poll by Tickbox.net showed that workplace dissatisfaction increased significantly with the age of their computer equipment. People simply cannot work with old technology and slow computers.
These two warning signs show that every business must stay up to date with technology in order to remain competitive and productive. However, due to budgetary problems, it is hard to buy new computers every 2 years. This is where the “Rent versus Buy” decision must be taken.
While the benefits of renting over buying are clearly outlined on this website, Spartan is committed to assisting customers find the best solution to their problem. We help our customers understand the implications and help them appreciate all the factors that are affecting their decision. This way, our customers are well informed about all the financial and non-financial implications of renting. Helping you make the right decision is our top priority!
What is a rental?
Asset finance is a mechanism of finance to business, including companies, partnerships, sole traders, and the public sector, for their acquisition of assets and/or equipment. The main finance mechanisms are Installment Sale Agreement (also called Hire Purchase or simply HP), Finance Lease, Operating Lease (also known as Rental), and Full Maintenance Lease (abbreviated FML).
Here is what each mechanism is meant for:
Installment Sale Agreement (known as Hire purchase or HP) – a contract that spans over a period of 6 to 60 months, whereby your business can acquire ownership and use of the asset in perpetuity. Once you make the final installment payment to the finance house, ownership reverts to you. From a tax perspective, SARS allows the business user to depreciate the asset according to an appropriate formula, usually 25% per annum over a four-year period.
Lease Agreement (Finance lease) – a contract that expands over a period of 6 months to ninety-nine years, whereby the Lessee (you) acquire use of the asset for the duration of the agreement in return for a monthly rental fee. For practical purposes, equipment is usually financed over a period of maximum 60 months. At the end of the agreement period, you may acquire ownership of the asset, usually in return for the payment of a nominal sum to the Lessor (the finance house). Subject to approval by SARS, you will be allowed to offset your monthly rentals against income. There is no VAT benefit to the business user with this type of agreement. Only the Lessor will enjoy a VAT benefit.
Rental Agreement (Operating lease) – a contract that expands over a period of 6 to 60 months whereby you acquire the use of the asset, in return for a monthly rental fee. When the useful life of the asset has ended, you simply hand the asset back to the finance house (the rentor). Strictly speaking, you may never own a rented asset. SARS will allow the business user to offset monthly rentals against income. The business user may claim a VAT input credit on each monthly rental.
Full maintenance lease (rental) – a lease in which the lessor assumes responsibility for all manufacturer-recommended maintenance and service for the equipment. The lease may also cover additional mechanical repairs and servicing during the term of the lease.
Finance Leases and Operating leases
Under a finance lease, the finance agreement covers the full economic life of the asset. An operating lease (rental) runs for less than the full economic life of an asset, and the lessee is not liable for repaying the finance costs of its full value. The rentor retains the risk associated with the residual value of the asset at the end of the lease. This type of lease is frequently used when the equipment is likely to have a resale value. In this case, good examples would be aircraft and vehicles. The customer simply gets the use of the equipment, sometimes along with other services.
For the rentee, the rental contract is less risky than outright purchase, as the rentor takes on the risks of ownership of the depreciating equipment. This is particularly true for operating leases where the lessee is not exposed to changes in the value of the equipment and returns the equipment at the end of the contract.
Similarly, the rentor can afford to take more risks than providers of other forms of finance, because they own the equipment. The rentor can therefore price accordingly. This enables him to lend, for example, to SMMEs or to start-ups.
