Since the start of 2023, many start-ups have found it challenging to raise capital. Also, with loan interest rates at multi-year highs, the cost of business is soaring for many corporations. As a result, these days, many start-ups and corporates prefer to keep their balance sheets asset-light.
Rather than buying assets, they prefer to lease them. Some start-ups have identified this lease financing business opportunity and extended it to retail investors for participation and earning good returns from it.
In this article, we will explore what lease financing is, how it works, which platforms offer it, the kind of returns you can expect, and whether you should participate.
What is lease financing and how does it work?
Various start-ups/companies need different kinds of assets to run their operations. For example, most need furniture, office equipment, vehicles, etc. Rather than purchasing these assets, they take them on lease. Lease financing refers to the concept of a company (lessee) taking assets on lease instead of buying them. The company leases the assets for a specified period and makes a monthly payment to the lessor for the assets. At the end of the lease period, the lessee company may buy the assets from the lessor at a pre-agreed rate.
Which platforms offer lease financing investment opportunities to investors?
In the last few years, some start-ups have entered the business of lease financing. These start-ups act as intermediaries between companies that want to take assets on lease and investors who would like to finance the purchase of these assets for a regular income. Some of these include Grip, LeafRound, etc.
Let us take an example to understand how a lease financing deal works. Furlenco is a company that gives furniture on rent to customers. However, Furlenco doesn't buy upfront all the furniture that it rents; else, the business will become very capital-intensive.
So, Furlenco approached a lease financing platform like Grip. Furlenco wants to lease furniture worth Rs. 70 lakhs for 36 months. The Grip platform will evaluate the proposal, and after doing all the due diligence, they will make the deal live on the Grip platform. Retail investors can participate in the deal with a minimum investment of Rs. 20,000. The investor can see the repayment plan with the details of the monthly cash flows. Accordingly, the investor can take a call on whether they want to invest and how much.
Once the deal gets fully subscribed for Rs. 70 lakhs, Grip will purchase the furniture assets and hand them over to Furlenco. Furlenco will further rent the furniture assets to its customers. Furlenco will make the monthly repayment to the Grip platform, which will further distribute it to the investors that participated in the deal.
What is the IRR that investors earn and what is the investment duration?
The returns investors can expect to earn may range from 12% to 24% IRR. The deal tenure may range from 6 months to 36 months. The minimum investment usually starts from Rs. 10,000.
What are the risks involved?
The key risk involves the delay or default in monthly repayment from the lessee. In such a scenario, the platform can repossess the assets from the lessee. The repossessed assets can be re-leased to some other lessee or sold in the market to recover the money and repay it to the investors. However, these measures may cover the risk only partially.
The profit earned is classified as income from other sources. It is added to the individual’s overall income and taxed as per slab rate.
Some platforms may follow the Limited Liability Partnership structure for lease financing deals. In such a case, the LLP pays the tax at the specified rate. The returns received by investors are post-tax and hence tax-free in their hands. So, check the tax structure followed by the company and follow it accordingly.
Should you invest in lease financing?
If you want to earn some monthly passive income, consider investing some portion of your overall investment portfolio in lease financing deals. However, be mindful of the risks involved. The amount invested in alternative investments should be limited to 5 to 10% of your overall investment portfolio.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.