Advantages of rentals

• Capital expenditure
  Rentals avoid capital expenditure approvals.
  
  
• Convenience to the user
  Due to the off balance sheet nature, rentals require much less accounting than outright purchase and conventional forms of financing. Purchase or leased assets must be capitalized and depreciated. Finance charges must be calculated on leases, which requires time and effort.
  
  
• Cost effectiveness
  When comparing the cost of high technology equipment acquired on a rental to that of purchasing, it is suggested that the discounted cash flow technique is the most appropriate method of comparison. From experience, we believe that a rental will provide a more cost effective option in net present value after tax cost, than a cash alternative.
  
  
• Cost in use
  The client pays only for monthly usage of the equipment. This assists with budgeting and cost management.
  
  
• Cost saving
  By using a rental, the client is retaining working capital. No deposits are required, thus not influencing capital outlay.
  
  
• Ease of administration
  The assets under a rental agreement do not require maintenance in the user's asset register, but are merely a periodic operating expense.
  
  
• End of agreement options
  In terms of the statutory requirements, a rental agreement continues indefinitely, but has a minimum period as described. It is possible for the equipment rented to be acquired at a nominal cost. It should be noted that there are income tax implications for the user in exercising this option. From experience we have found that most clients exercise the flexibility of the upgrade option and use the rental facility to maintain pace with technology rather than acquire ownership.
  
  
• Flexibility
  The rentals quoted are straightforward examples of rental facilities available. Rentals can be structured to meet specific customer requirements such as budgetary constraints and future upgrade plans and are only limited by the clients' credit profile and the economic life of the product financed.
  
  
• Inflation hedge
  When compared to conventional forms of financing, rental agreements, with their flexible structures offer a hedge against inflation. Longer periods, no deposits and annual escalations results in lower entry level cost and allows the user to pay future rental with inflated Rands.
  
  
• Off balance sheet
  Subject to the compliance with the off balance sheet requirements of accounting practice code 105, a rental facility has no impact on the user's balance sheet. As the user is merely paying for the use of the equipment rented (an operating expense), the rental need not be recorded as a liability, nor need the assets be maintained in the user's asset register. As the facility is off balance sheet, it has no impact on the user's other financing facilities.
  
  
• Operating facilities with banks
  No bank can offer off balance sheet finance directly to clients.
  
  
• Psychology of use preference over ownership
  It is increasingly accepted that it is the use of high technology assets that create value for business, rather than ownership of these assets. Given conflicting demands for capital in any business, together with the high cost of capital in the South African market, it makes sense to use someone else's capital to fund rapidly depreciating assets and your own capital to fund core income producing projects.
  
  
• Tax advantage
  Rentals are fully tax deductible from the annual taxable profit, thereby minimizing tax obligations.
  
  
• Technology
  The renting of goods enables the client to keep track with technology changes and not having to sit with outdated technology that could prove to be very costly in today's world of modern technology. The client has the option of upgrading the equipment during the contract; thereby providing flexibility to change as technology improves or as the company outgrows the equipment.
  
  
• VAT implications
  The VAT on a rental is raised on the monthly payment and not capitalized "upfront", as in a lease or installment sale. The VAT is, therefore, not "financed", resulting in lower upgrade costs and more flexibility. If VAT increases, the client claims a higher VAT rebate. Thus, an increase is not a disadavantage because a higher rental is claimed in the client's income statement. VAT on a rental is regarded as input VAT and may be written off against any output VAT collected.