The leasing industry and the role and evaluation of leasing in corporate financing strategies

The U.K. capital market has observed a remarkable growth in the use of lease financing as a tool of financial management. It must be recognised, however, that its profitable use by Industry is dependent upon an easily applicable and theoretically acceptable method of evaluation within corporate capital budgeting procedures. Increasingly, analysts have come to acknowledge the need to integrate corporate investment and financing decisions insofar as concerns the acquisition of industrial plant and equipment. However, traditional methods of lease evaluation fail to examine its integrative nature, and in consequence, they neglect the critical interdependencies which encompass the simultaneous decision process. Extant lease evaluation models also fail to consider the consequences of the earnings generated by the "Residual Capital Balances". That is, the working capital freed when leasing is strategically used to relax what otherwise would be an unacceptable shortage of funds. Such earnings are a fundamental part of an integrated lease cash-flow profile under certain circumstances: namely, the use of leasing as part of a "Planned Financing Mix", as opposed to its use as an emergency or "spill-over" financing when no residual capital occurs. On the basis of extensive empirical study into the circumstances under which U.K. financial management had recourse to leasing, a hypothesis was developed to explain the role of leasing in corporate financial planning and debt management. The research proceeds to establish models for the evaluation of leasing under "spill-over" conditions (where all otherwise available sources of finance are, or appear to be, exhausted) and "Planned Financing" conditions (when the use of leasing in quantitative terns is formally envisaged as part of the corporate financing policy). In this way it is possible to determine the risks implicit in the haphazard use of leasing together with the benefits available to its planned use.