Leasing Business Model – How Does It Work?

Introduction

The economic landscape today has greatly transformed as compared to previous times. This is essential because in the modern-day and age, the competition is more intense, and the struggle to survive amidst the complex business dynamic tends to be the number one priority for many businesses.

This requires them to be on the top of their game and ensure that they can to the market pressures to outshine and sustain themselves economically.

This might require them to innovate not only on product dimensions but also in their processes, ensuring that they operate at an optimized scale.

Fixed Asset Planning tends to be one of the most primitive causes of concern in this aspect, and many companies are unable to expand considerably because of their inability to make such considerable expansions.

However, the leasing business model is designed to address this very issue, primarily on the grounds of enabling that the financial arrangements work out to be a win-win for all the parties involved.

What is Leasing Business Model?

Product Leasing or Leasing Business Model can be defined as a service compensation model where the customer (or the party who uses the asset) pays the amount to the lessor (the owner of the asset) for a specified period of time, during which the user of the asset (also referred to as lessee) has a legal right to the asset.

In the Leasing Business Model, the owner of the asset, or the party that has purchased the asset maintains the legal ownership of the asset.

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Depending on the specific conditions mentioned in the lease arrangement, the asset owner also maintains the asset if there is a maintenance-related concern arising within the asset.

Leasing Business Model is widely accelerating in terms of popularity, because of relative convenience it offers to different businesses.

Many businesses prefer not to spend a substantial amount of money in the very initial stages of the business because it often takes an unnecessary strain on their cash flows.

Leasing Business Model gives them the much-needed liberty to use the asset and begin operating without worrying about the capital expenditure earlier on in the business.

Even during an established business, business owners are reluctant to spend on Non-Current Assets straight away because of the funding issue. Therefore, Leasing Business Model has proven to be a prevalent business model.

This is because it tends to open up several different avenues not only for business owners but also for investors who have the funds to invest in those assets against a fixed return every month.  

How Does Leasing Business Model work?

The leasing Business Model basically works when two parties are in place. One of them is interested in using the asset, and the other party already has the asset available and ready to be used. This can be illustrated using an example.

Let’s suppose there Miniature Inc. needs to procure assets for expansion. However, they are unable to afford the funds that are required for the capital expenditure. On the other hand, Tycoon Inc. has the knitting unit that Miniature Inc. is looking for.

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Moreover, Tycoon Inc. is interested in leasing the asset because they are currently not using it, and they are looking to get alternate returns via this particular asset.

Both of these companies can get into a Lease Agreement, which would give Miniature Inc. a right to use the particular asset (the knitting machine). At the same time, Tycoon Inc. would also be entitled to compensation against using the asset.

They also agree that in case the machine would require maintenance, Tycoon Inc. would be responsible to pay for all the maintenance.

The example given above is a classic example of how the Leasing Business Model works. Many companies are leasing machines to other respective companies, which is their revenue-generating model.

Conclusion

The leasing Business Model is one of the most popular business models in the contemporary business world. It is considered to be an enabling factor in helping other companies expand without actually purchasing the asset.

In the same manner, it also gives the owner of the asset a chance to utilize it in a productive manner, which would otherwise be a redundant asset for them.

Hence, it is beneficial for both parties, which tends to be why an increasing number of businesses are reliant on this particular business model today.

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