Equipment finance is the most dynamic field that encompasses various methods of funding for businesses to acquire essential assets, ranging from equipment and machinery to vehicles and even software. It is a vital component of asset finance without the upfront costs associated with ownership. Basic equipment finance is really a combination of two elements: (1) the credit of the user; and (2) the residual value or re-marketing ability of the equipment, the two alternatives may have very different values. The various levels of equipment finance range from full payment ( or finance lease) to operating or true lease (combination of credit and residual value expectations) to daily rentals. Technology now allows us to create a variety of risk management models. Why is the primary model still just based on credit and residual value?
Ijarah leasing is a Shariah-compliant form of asset finance where ownership stays with the lessor while the lessee pays rent for use. It avoids interest and emphasizes real assets and risk sharing. With growing wealth in Muslim countries, ijarah has become a key tool to invest primarily in big ticket assets.
Structured Equipment Leasing
Equipment leasing goes from simplistic to extremely complex. The goal varies from lowering the cost and increasing the flexibility for the end user to minimizing the residual risk for the lessor or the lender. Complex structures involve the use of accounting and tax benefits, or combinations thereof. Over the years a number of very distinct structured leasing strategies have evolved. When corporate tax rates reached fifty percent plus and interest rates in some countries were close to twenty percent, many tax advantaged and tax arbitrage solutions evolved. Tax advantaged transactions, such as leveraged leases, were primarily based on deferral of tax, based on accelerated depreciation. Tax arbitrage transactions were based on cross border transactions benefitting from different approaches to the classification, and thus taxation, of equipment leasing. Needless to say, it only involved very large big ticket transactions, such as aircraft, based on the legal and tax expenses involved . Many structures are obsolete, or partly obsolete, today due to tax reduction globally and interest rate falling dramatically, combined with increased regulation and accounting changes.
Hybrid or Unorthodox Structures
These are not necessarily equipment leasing structures per se but often the use of equity and other hybrid structures or insurance to achieve the goal. The goal in this instance is generally to offer a competitive rate to the lessee and, simultaneously minimize risk and maximize profit. The Equipment Leasing class here is primarily operating leases. This is one area where Adroit Capital Partners and its predecessors have specialized and where we intend to educate a small group willing to learn.