Residual Value Leasing

Residual Value leasing: The Advantages and Disadvantages

When it comes to business financing, Residual value leases are a popular option for companies looking to manage their assets more efficiently. Understanding the advantages and disadvantages of Residual value leases is an important step for businesses to take in making informed decisions that align with their financial strategies and operational needs.

What is a residual value lease?

A residual value lease is a rental agreement in which the lessor retains ownership of the asset and the lessee pays for its use over a specified period. Residual value leases allow for the use of an asset, but the lease term is short compared to the useful life of the asset. As a result, residual value leases do not transfer ownership rights at the end of the term. Instead, the lessee can either return the asset, renew the lease or upgrade to a newer model. This type of lease is commonly used for equipment, vehicles and technology assets, providing flexibility and reduced financial risk for businesses.

Advantages of residual value leases

Companies can easily upgrade or replace assets as they need to when using residual value leases. This is particularly beneficial in industries where technology evolves rapidly, ensuring that businesses can stay competitive by using up-to-date equipment. There are also typically much lower upfront costs compared to purchasing assets outright, preserving capital and allowing businesses to allocate resources to other critical areas.

Lease payments can be treated as operating expenses, potentially offering tax advantages. These payments are deductible, reducing the overall taxable income of the business. Furthermore, residual value leases are often classed as off-balance-sheet financing. This means that the leased asset and corresponding liability do not appear on the company’s balance sheet, improving financial ratios and making the business appear more attractive to investors and lenders.

Since the lessor retains ownership, the lessee is not burdened with the risks associated with asset depreciation and obsolescence. This risk transfer can be particularly advantageous for businesses operating in sectors with high depreciation rates.

Disadvantages of residual value leases

While residual value leases have lower initial costs, they can be more expensive over the long term compared to purchasing an asset outright. Continuous leasing without an end goal of ownership can accumulate significant costs. It’s a good idea to look at the total cost of a piece of equipment over its lifespan when comparing residual value leases to other forms of procurement. Residual value leases come with terms and conditions so there may be additional fees or penalties in case of early termination or breach of contract.

Leased assets might have limitations regarding customisation. This can be restrictive for businesses that need specialised equipment tailored to their specific operational requirements.

At the end of the lease term, the lessee doesn’t own the asset. For some businesses, this may not be a problem at all, however for those businesses that prefer owning their assets as a long-term investment, this may be a disadvantage.

How Can CHG-MERIDIAN Help Businesses?

CHG-MERIDIAN is a global provider of technology management and financing solutions that can assist businesses in maximising the benefits of residual value leases. Here’s how:

CHG-MERIDIAN offers tailored leasing options that align with the specific needs and budget constraints of each business. With our expertise, businesses can optimise their asset management strategies, leading to improved financial efficiency and operational performance.

From procurement to disposal, we provide comprehensive lifecycle management services, including asset tracking, maintenance and end-of-lease transitions. CHG-MERIDIAN is committed to sustainability, offering environmentally friendly disposal and recycling services. This aligns with CSR goals and helps businesses reduce their environmental impact.

If your business would benefit from leasing, get in touch with CHG-MERIDIAN today.

Contact Us

We'd love to hear from you! If you have any questions please feel free to get in touch with us directly.

Simon Young

Vice President Sales UK/Ireland

Declan McGlone

Vice President Finance UK & Ireland

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