The importance of leasing for SME finance (Kraemer-Eis, Helmut;

Lang, Frank)

The relatively high importance of leasing for the external financing of SMEs is confirmed
by the recent study “The Use of Leasing Amongst European SMEs” which was prepared
by Oxford Economics (2011) for Leaseurope, the European Federation of Leasing
Company Associations. In 2010, according to the survey, leasing was the most popular
source of external financing, which was used by 40% of the surveyed SMEs in 2010.
The second most important external financing source was bank loans of more than 3
years.
The results are broadly in line with the findings of Oxford Economics (2011): Broken
down by size classes, 28% of micro enterprises used leasing, 42% of small firms, and
53% of medium sized firms.
According to recent survey results (Oxford Economics, 2011), SMEs on average have a
variety of reasons for their decision to lease an asset. However, the main reason seems
to be price considerations (price of leasing relative to other financing forms). The
importance of different reasons for using leasing becomes clearer when looking at
different SME size classes. For example, medium-sized enterprises seem to lease due to
price considerations, better cash flow management and the absence of the need to
provide collateral. In contrast, micro-enterprises stated tax benefits next to price
considerations as main reasons to use leasing. Interestingly, the absence of collateral
requirements seems to be less important for micro-enterprises than for small or
medium-sized firms.
Reasons for leasing vary more over countries than over sectors. According to Oxford
Economics (2011) this could be due to different tax and regulatory environments. For
instance, collateral considerations were most important in France and Italy, while tax
benefits were mainly stated in the UK.
Participants of the Oxford Economics (2011) survey were also asked why they did not
use leasing or – in the case of leasing users – why they did not use leasing to a larger
extent. The two main reasons were the preference to own the assets outright and a
better price in case of an asset purchase than in case of a lease. However, as stated
above, price considerations can also lead to a positive decision to lease, depending on
the circumstances of the financing project.
The choice of a particular financing source can also depend on the specific investment
type, e.g. on the asset which is financed. However, vehicles of various types account by
far for the biggest share
Financial constraints and the decision to lease: Evidence from
German SME (Slotty, Constantin)

The objective of this paper has been to present and discuss empirical evidence on the
role of leasing for small and medium sized enterprises. Over the examined period the
number of firms using leasing (operating and finance) has grown by 27.5%. Altogether
around 50% of firms in our sample used some form of leasing at the end of 2006 of
which 90% preferred non-capitalized leases. But not only prevalence but also the use of
leases for lessee firms has increased by 16% over the observation period.
We tested in particular the hypothesis that financially constrained firms lease a higher
share of their assets to mitigate problems of asymmetric information. Therefore, a
comprehensive measure of total lease expenses was utilized as proxy for the degree of
the financial constraint of a firm.
For small firms leasing appears to play a vital role in providing financing, since leasing
costs comprise 52% of their external financing expenses. Larger firms, on the other
hand, cover a relatively smaller 32% of their external financing requirements with
leasing. Notably, the average interest costs are 5.1% for small firms and 4.2% for
larger SME in our sample. These descriptive figures are further corroborated by the
results of GMM estimation that higher interest costs, smaller firm size, strained liquidity
and higher growth rates have a positive impact on leasing.
On balance the descriptive and empirical evidence seems to support the theory that
firms which are more likely to suffer from problems of asymmetric information have a
greater exigency to lease. These results are in line with Sharpe and Nguyen (1995) who
find strong support for the hypothesis that firms that are prone to be burdened with
relatively high premiums for external funds also have a greater propensity to lease as
well as with the findings of Krishnan and Moyer (1994) that lessee firms have higher
growth rates. Furthermore, the results suggest that the tax argument, often used by
lessors as selling point, does not have an impact on the decision to lease.

The determinants of the leasing decision of small and large

companies (M. Ameziane Lasfer and Mario Levis)

The purpose of our analysis is to determine the extent to which leasing is

supporting the level of fixed investment undertaken by various size
companies in the UK. To do this, we analyzed financial statements of more
than 3,000 individual companies registered in the UK over the 1982–95
sample period. We analyze the probability of using leasing by comparing the
financial performance and other characteristics of companies that reported
financial lease and hire purchase in their accounts to companies that did not.
We show that, for the sample as a whole, companies that use leasing are
more likely to have tax losses, high debt-to-equity ratio and to be larger than
companies that do not use leasing. In particular, our results show that
companies with high fixed capital investment are more likely to use leasing
than companies with low additions to other than buildings and property
tangible fixed assets. Our results suggest that leasing contributes significantly
to the financing of fixed capital formation of a large number of UK companies
and imply that without leasing many projects would not have been
undertaken.
Our results reveal, however, that the reasons for leasing are not the same
across companies of different size. We show that, for small firms, taxation is
not the major determinant of leasing. Instead, leasing is driven by growth
opportunities; small growth firms are more likely to lease than small mature
companies. Furthermore, our results show that leasing allows small
companies to survive. We show that small less profitable companies are more
likely to lease than other small cash-generating firms and small lessee firms
have, on average, substantially lower bank borrowing than non-lessee
companies. While these results imply that these lessee firms cannot access
the debt market because of their low profitability, they could also suggest
that, because of potential internal and external agency costs, small growth
firms prefer to lease than to borrow-and-buy their assets. Similarly, the lack
of profitability of small lessee firms could be due to the financing of their
growth opportunities.
For large firms, leasing appears to be driven by tax savings. We show that
large firms that lease their assets are more likely to have high tax carry-
forward and, for quoted companies, high ACT surplus than non-lessee firms.
Leasing is also driven by profitability. Large lessee companies are, in general,
more profit- able than non-lessee companies. Moreover, for these large
companies, leasing is a complement to debt financing. We show that large
lessee firms have, on average, substantially higher relative bank loans than
non-lessee companies. Our overall results suggest that leasing allows small
firms to finance their growth and/ or survival while for large firms, leasing
appears to be a financial instrument used by sophisticated financial managers
to minimize their after-tax cost of capital.
Capital market imperfections and the incentive to lease
(Steven A. Sharpe, Hien H. Nguyen)

This paper evaluates the influence of financial contracting costs on public

corporations’ incentives to lease fixed capital. It argues that firms facing high
costs of external funds can economize on the cost of funding by leasing. It
constructs several measures of leasing propensity, plus some a priori
indicators of the severity of financial constraints facing firms. This paper finds
that the share of total annual fixed capital costs attributable to either capital
or operating leases is substantially higher at lower-rated, non-dividend-
paying, cash-poor firms - those likely to face relatively high premiums for
external funds.
It finds strong evidence that a corporation’s propensity to lease is
substantially influenced by the financial contracting costs associated with
information problems. The main results concern the total lease share, or the
percentage of firms’ total annual costs of property, plant, and equipment use
accounted for by capital or operating leases. After controlling for firm size
and other factors, our estimates suggest that the total lease share of a low-
rated firm that pays no cash dividends is about 25 percentage points higher
than that of a highly rated dividend-paying firm. Not surprisingly, we also find
that tax-related motivations help explain the relative propensity to lease.

DETERMINANTS OF THE CHOICE LEASING VS BANK LOAN:

EVIDENCE FROM THE FRENCH SME BY KACM (Marie
Christine Filareto-Deghaye, Eric Séverin)

The question of leasing credit as a substitute or complement of a banking

loan has still not been resolved in the financial literature. As a continuation of
these arguments, the objective of this article is, on the one hand, to
determine the characteristics of firms using leasing credit and on the other
hand, to better understand the relationship between leasing and credit
rationing. Firstly, our results suggest that SME use leasing all the more the
leasing so when they are young, leveraged, less solvent and that they
present a small size and an important failure probability. Thus, leasing pushes
back the limits of banking debt for firms that have no access to it. Secondly,
our results suggest a strong and significant relationship between credit
rationing and the use of leasing. In this framework the latter appears to be a
last resort financing.
Empirical test results highlight significant effects for the different factors
explaining the use of leasing. Indeed, firms use leasing all the more so when
they are young and are of a small size, leveraged and they have a smaller
solvability and when they present a strong likelihood of bankruptcy. These
profiles testify a stronger risk of failure. The weakness of bankruptcy costs for
the lessor, in the case of default by the firm, justifies then leasing financing
for firms in a situation of credit rationing (Krishnan and Moyer, 1994; Sharpe
and Nguyen, 1995).

Leasing pushes back the limits of bank debt, for firms that there have no
access or no longer access (firms with a high leverage) and would be more
often used when the firm can no longer bear the costs associated with the
ownership good or can start up a new activity.

It has consequently sought to check if our results were robust, by verifying

the association between the extent of these variables and the existence of
credit. To do this, it evaluated the degree of credit rationing of the firm by
the following ratio: fiscal and corporate debt/ going concern debts.

Delays in the payment of social and corporate debts generally highlight

serious cash flow problems, due to credit rationing (De Bodt et al., 1999).
The Wilcoxon test shows significant results for the following variables: size,
leverage, probability of bankruptcy and solvency. We verify consequently that
relationships have their origin in credit rationing.