History of Leasing

The act of "leasing" makes up a significant part of vehicle and equipment finance. It is thought that in the UK, in 2012 alone, more than £70 billion will be spent simply leasing vehicles, equipment and plant.

There is a surprisingly long history of leasing, with documents (in the form of clay tablets) discovered in Iraq suggesting that the leasing of equipment might go as far back as 2010BC! The leasing in question was for farm equipment. Just half a century later and the first leasing laws are thought to have been introduced by the King of Babylonia. It was known as the Code of Hammurabi. The early civilisations formed in the likes of Egypt, Rome and Greece all benefited from leasing both land and property, whilst over in Phoenicia, the chartering of ships was a form of leasing and was widely used.

Here in the UK, leasing didn't appear on the scene until the 1600's, with the financing of horse drawn carts setting the scene for what the industry was to become. In the 1800's it was the turn of the railroad. In order to finance those great locomotives of old and to fund the extension of tracks into new areas of the country, those in the business had to seek new methods of financing when banks were very reluctant to release funds for what were seen as very adventurous and risky projects.

By the 1900's the sort of leasing we see today began to take shape, as companies became lessors by leasing equipment and machinery whilst still claiming ownership of it. Many of the lessees would be those wanting to ship cargo to various ports, without having any direct responsibility for the contents of the cargo itself.

Disaster was to strike in the 1920's with credit sales becoming too prominent and as this sort of spending spiralled out of control, a direct link with the Great Depression of 1930 was established.

For all the traumas of World War 2, leasing once again became popular during this period. Cost-plus contracts were established between the government of the day and manufacturers. As well as guaranteeing a profit, manufacturers were also able to recover costs within this system. To reduce costs, companies would lease specific machinery from the government. Knowing that the machinery could be returned once the lease had ended was a major benefit for the manufactures that faced the prospect of owning a whole lot of useless equipment at the end of the war, had these leases not been available.

As the war years began to fade away, demand for all things new and efficient grew at an astonishing rate. With the aid of leasing, companies were able to update and reenergise businesses and facilities as new ideas were unleashed on the public. Televisions, communications and the airline industry were just some of the products that set the tone.

As things progressed, it was clear that there was a need for a system that involved formal leasing of both equipment and cars. The industry was born anew.

Since then, the growth of the industry has been rapid and strong. Despite numerous obstacles such as the unpredictability of the financial world, it continues to strengthen across the globe. There is now huge competition in the market place too. It's not just banks and insurance companies, as independent leasing companies and third party vendors all highly competitive as they vie for their own corner of the market.

The benefits of ownership and the benefits of use were now entirely distinguishable, one from the other.

The first general equipment leasing company able to make the most of ownership tax benefits whilst at the same time distributing the right to use the equipment and maintenance expenses to another party, was Lombard North Central. For the inclusion of a nominal purchase fee, ownership was often handed over to the lessee at the end of the contract.

By the time 1955 arrived, leasing was widespread and there were more and more entrants into the burgeoning market. However, despite the introduction of new products, a fly in the ointment arose in the form of a tax code. The code which has been used by the Inland Revenue in the year before was cloudy and distinguishing between a proper lease and an agreement of conditional sale was unclear. With the tax benefits now a staple diet for many of the companies involved, there was a reluctance to go anywhere near a situation that the Revenue might query.

Huge companies such as Xerox and IBM pursued the leasing option more and more as a form of product distribution. With ownership of the equipment still in hand, shorter terms were offered and once the contract was ended, the equipment would be remarketed. In the world of computers this would turn out to be a masterstroke, as nobody wanted to be left with a computer or copier that was effectively "out of date". A snowball effect throughout similar industries and things like furniture sales occurred.

The humble lease also evolved and new products were introduced, such as something known as the leveraged lease, which actually involves 3 parties. A lessor, lessee and lender all enter the agreement. The lessor finances the equipment and commits 20% equity whilst borrowing the remaining 80% on a non recourse basis from a lender. The lessor is able to retain all the tax benefits and can even take out loan interest. These benefits permit the lessor to provide the lessee with remarkably low rental terms and still retain a high yield.