Why Leasing Can Play Key Role in Growth of SMEs

Road construction leased equipment comes with numerous advantages

June 6, 2018//-Kenya’s economic growth is pegged on its ability to create wealth and employment opportunities, while at the same time expanding access to public services.

The country has over the last two decades invested heavily in infrastructure development with both the government and the private sector rolling out mega projects in roads, power generation and ramping up local assembly and production.

Statistically speaking SMEs form the bulk of Kenya’s companies with over 1.5 million registered SMEs according to the Kenya National Bureau of Statistics (KNBS). In its 2016 Medium and Small Medium Enterprises Basic Survey Report, KNBS found that; 75 per cent of Kenyan companies are SMEs, accounting for 18.4 per cent of national GDP.

However, SMEs generate 92 per cent of all new jobs and account for 80 per cent of total employment. Despite the impressive figures, KNBS found that over 40 per cent of SMEs fail within their first year of operations due to a combination of economic factors.

One of the key causes of failure is access to finance. Other factors include; lack of adequate corporate governance structures, policy and administrative barriers, access to market, licensing and unfair competition.

Most of these challenges will require long-term engagement towards policy and legislative reforms between the government and the private sector.

SME’s acquire various types of moveable assets for their day to day operations ranging from vehicles, to machinery and ICT equipment.

Due to capital limitations, most SME’s adopt a phased approach to asset acquisition often slowing down their operations and capacity to undertake major projects and also missing out on opportunities.

To overcome these limitations, SMEs should seek alternative means to finance asset acquisition that will enable them to access and use assets to the required scale and within their capabilities. One such alternative is leasing.

A lease is simply an agreement between the owner of an asset known as the lessor and a third party seeking to use the asset without owning it; known as the lessee.

Under a lease agreement the lessee pays an agreed regular fee to use the asset while the lessor is responsible for its maintenance.

Through leasing, SMEs can access a wide variety of moveable assets ranging from office furniture and fittings to IT equipment and vehicles as well as manufacturing and assembly lines.

The capital that would have been expended in the purchase of assets can in turn be converted into working capital, enabling SMEs to dedicate their capital to their core business, while using assets without taking on the risk of owning them.

Leasing also comes with an added advantage in that the rentals paid by the lessee are allowable expenses to the business and are deducted before calculation of tax, making leasing a more tax efficient financing solution.

Leased assets also shield businesses from the cost of replacement of the assets due obsolescence, changes in technology or wear and tear.

Lennox Mugambi is Deputy director and head of Asset Finance, NIC Bank

Business Daily Africa

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