Lend lease by Banks as a Cash Flow Management Tool
Where cash flow is in short supply and the business can be classified as cash- starved, Lend lease is an attractive alternative for acquiring business assets.
Lend lease is especially important for businesses which rely upon cutting- edge technology to operate efficiently, for example, the latest computers and communication devices.
lend lease should be greatly considered by businesses in early stages of development. lease lending is like a quick loan to a business.
Meaning of lend lease
Lend lease means leasing equipment where a dealer already owns the equipment that the business requires. In exchange for the equipment, the business (that is the lessee) makes monthly payments to the owner (the lessor). The ownership of the asset remains with the lessor or owner.
Lend leasing is greatly beneficial to the company because apart from ensuring the company has sufficient cash flows, the monthly payments are treated as tax deductible business expenses reducing the tax liability.
Some of the advantages to the business to go for Lend lease are:
- Reduces the amount of cash needed to finance acquisition of equipments and machinery.
- The monthly payment structure allows the payment to be treated as tax deductible business expenses.
- Leasing also makes it easier for the business to keep pace with technology especially if the business relies on the cutting- edge technology.
- It is a faster way of obtaining equipment.
Business considerations for lend lease financing from the bank
- Lease term- The length of the lease will affect the monthly repayments, that is, a longer lease term means lower monthly rent to be paid and vice versa.
- Upfront payment- the customer should establish this in light of the cash flows so as not to commit the much needed cash for business operations.
- Monthly payments- One should analyze the amount to ensure that the cash flow of the business is not affected.
- Return Rights- It should be clear under what circumstances the lessee can return the asset when problems are encountered.
- Early Termination- Most lessors are reluctant to include this clause, but it would be good for the lessee to negotiate an early termination right in exchange of paying a fee.
- Option to purchase- the lessee should also negotiate an option to buy the leased equipment at a fair market value
- Substitution Clause- This helps the lessee update or exchange the equipment to avoid paying for obsolete equipment or technology.
Lend lease is a very unfamiliar type of lending to most businesses in developing countries. Lend lease is the next level of borrowing for companies who need to grow and manage their cash flows.