Definition
It is a comprehensive service for the rental of equipment necessary for business activity, for a specified period, also including the maintenance, repairs, insurance and necessary replacements of the rented property.
In principle, renting transactions cover every type of equipment, whether they are vehicles, medical equipment, office equipment, industrial machinery, etc., that is, any equipment whose full acquisition is not interesting due to its obsolescence or need for renovation.
Types of renting
- According to the depreciation criterion of properties:
- Full renting of the property: It consists of the rent during a determined period, depreciating the full value of the property.
- Leveraged renting: In this case, although also within a specified period, the instalments paid by the client do not cover the entire amount of the property that is the subject matter of the transaction. In this case, the renting entity must establish agreements with suppliers and distributors, guaranteeing the repurchase of the material.
In most renting contracts, the rental term is irrevocable.
- According to the entity-supplier-customer relationship:
- Agreed renting scheme: Equipment rental program agreed with a supplier / distributor of that equipment, which includes the operation, services and guarantees that it provides.
- Direct renting between clients: Renting transactions arranged directly with the client, without an agreement with the suppliers of the property subject to the transaction.
General characteristics of renting
A renting can be described by the following characteristics:
- Purpose: Lease of certain fixed assets properties (vehicles, computer equipment and other capital goods) that must be kept in good condition for use.
- Property ownership: The client enjoys the property on a rental basis, with no standard option to purchase at the end of the contract. Therefore, properties are not incorporated into fixed assets nor reflected in the company’s balance sheet.
- Term: From two to five years, depending on the type of property and the client’s needs.
- Instalments: They are usually of the same amount, and include the use of the property, insurance and certain maintenance services. VAT is applied on them.
- Settlement: Instalments are paid at the beginning of each agreed period (normally, on a monthly or quarterly basis).
- Purchase option: They can incorporate it, although it is not the most common.
- Renewal option: The contract can be renewed, in relation to the same property or a more modern one.
- Guarantees: The property itself, which, moreover, is insured. However, deposits may be required (which are returned at the end of the contract) and, where appropriate, personal guarantees.
- Investment: The rented equipment is not recorded in the customer’s fixed assets, as it cannot be considered as an investment.
- Formalization: By written contract.
Given that the cost of several of the services included in the instalment depends, in the case of vehicle renting, on the use that is given to the vehicle, the renting contract specifies a number of kilometres per period. If the company does not reach that figure, it can receive an account credit; on the contrary, if there is an excess of kilometres made, it will bear a surcharge.
Renting is more of a service than a financial instrument, since the rental component prevails. However, it can be an alternative to a personal loan or a leasing transaction.
