Why buy machines, when you can get the same on lease.
Businesses need to stay competitive and modernize to keep up with changing needs, but they often don’t have budgets for expensive equipment that will soon become outdated. A challenge faced day in and day out by startups, SMEs & MSMEs, where the limited capital has many askers, yet you want the best and most technologically advanced machines for your operations.
An alternative option available for businesses with limited upfront capital is equipment leasing. Equipment leases are available from leasing companies, banks, and other financial institutions. With this form of asset financing, a leasing company will lend the equipment for a certain amount of time in exchange for regular lease payments. By acquiring machines on a lease, companies can access the latest technology and be competitive without unnecessary strain on their cash flow.
Leasing equipment is often a more profitable alternative to debt financing. Leasing allows the acquisition of machinery and other capital equipment without paying the total cost upfront. Leases are usually flexible, provide tax advantage, and are transaction-free (No Mortgage). In addition, start-ups, SMEs, MSMEs and other companies can save their capital as well as collateral (Security to avail bank finance) for working capital purpose.
The Future of Global Equipment Leasing
With tech companies (IT equipment’s) and manufacturing entities being the largest population of clients for lease finance providers, the market for equipment leasing is all set to grow. Startups and SMEs need advanced and expensive equipment but are driven by cost efficiency, and lease financing offers them a win-win platform.
The global machinery leasing market was estimated at $820.27 billion in 2019, with a projected $1.76 trillion by 2026, growing at a CAGR of 12.3%. Much of this growth can be attributed to companies rearranging their operations in the wake of the left behind by COVID-19. While the pandemic had initially dampened demand for machinery and equipment, a subsequent liquidity crisis has accelerated the adoption of Leasing as a strong financing alternative. Leasing provides businesses with the latest equipment and maximum uptime without any capital investment.
Lease Financing in India
While the global equipment leasing market continues to grow at a fast peg, equipment leasing in India is at a nascent stage. Equipment leasing in India accounts for ~1% of the broader market, compared to the global average for Leasing, which stands at 35-40% of the whole market. However, several factors will propel the equipment leasing market over the next decade. For instance, India’s broader machinery equipment industry has significant growth opportunities with a CAGR of 7.3% over the next decade. Thus, the total addressable market will grow from $133 billion in 2020 to $250 billion by 2030.
Offline Leasing accounted for 98.2% of the total share in the market, with online services accounting for a measly 1.8%. However, strong digital adoption and innovative financing models should enable the online leasing market to grow at the highest CAGR of 10.4% during the forecast period. Furthermore, the machinery and equipment leasing market will see tailwinds from a shift to online services.
More recently, Leasing companies in India have started offering end-to-end solutions, including asset lifecycle management, to their clients. This one-stop solution covers evaluation, procurement, insurance services and maintenance, upgrades, and equipment returns. They also offer equipment recommendations based on business needs/technical requirements and return on investment. Many original equipment manufacturers have set up captive financing and leasing units in India. This trend is slated to continue. Banks have also set up special lease financing verticals. Lease investing is also becoming popular in the Indian market as an excellent diversification tool in the asset-backed investment space.
Startups and Lease Financing
Several startups in different verticals have scaled up quickly by adopting lease lending. Some examples include transport services such as Ola, Rapido, Big Taxi, and Bounce; Equipment Providers including Rentsher, Furelnco, Rapidbox, and Bigspoon; EV Charging stations such as Chargezone and BatterySmart. As startups are the key drivers of the growth of Lease Financing, given the fact that India is the hub for startups, the growth of equipment lease financing in India is inevitable.
For Indian startups, Leasing is less expensive than buying and more efficient in the long term because it allows them to upgrade their inventory with newer models at little or no cost. The growing awareness around lease financing and the benefits it brings to the table is increasing the traction amongst the fraternity.
Equipment and Machinery leasing have traditionally been underrepresented as a source of financing in India, having a low market share compared to its global counterparts. However, the fast-changing technology, the shorter life span of machines, the high cost of upgrades, low resale value is forcing companies to look at equipment lease financing to stay ahead of the curve without bleeding. Innovative end-to-end solutions and new offerings by banks and NBFCs are all contributing to the growth of lease investing as a vertical.
Equipment leasing is emerging as a lucrative option for those looking to grow their businesses as asset-light companies.
(The author Mr.Shrikant Goyal, Co-Founding Member & Managing Partner, GetFive and the views expressed in this article are his own)