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Introduction:

The computer and office automation market is the most rapidly changing market in the world today. Historically, user needs continue growing. Keeping pace with technology, continually improving service to clients and improving operational efficiency has become a complex issue.
 
It is against this background that specialized financial has become more and more a factor of computer and office equipment usage. Existing methods of financing, although adequate, have not addressed the problems incurred in a continually changing market. In order to address these problems, the emphasis has changed from "What is would cost to buy?" to "What it would cost to use?" a computer system, photocopier or fax - at any given time.
 
It was to answer these questions that RENTAL FINANCING was developed and introduced to the computer and office automation market. Rental financing is aimed specifically at the computer/high technology and office automation market and caters for change over a period of time. It is therefore possible for users to expand their systems as needs indicates, and to do so without drastically affecting their budgets and cash flow.
 
Although flexibility is of major importance in any computer of office equipment installation, the rental package has further been designed to offer the greatest possible tax advantages, as well as to cater for the high inflation rate in the economy today. Structured financing allows savings in today's money ( the most expensive) and then allows inflation to erode the value of money over a period of time. 
 
This is not only more economically viable, but also improves return on the investment of the computer system and office equipment itself.
The PLS Policy is to ensure that clients are continually kept abreast of the latest financial development in the computer and office automation market, and to address the individual needs of these clients. It is with this understanding of the industry that rental financial is offered on all computer systems and office equipment by PLS who specialize in various forms of asset financing.
 
Tailor-made financing package are created depending on the client's requirements to cater for cash flow and budget constraints, rent free periods, residual values, bullet payments, etc. An overview of the major aspects of the renal concept is included for your perusal.
 
The following are the salient features of a Rental Agreement:
 
1. Use and Enjoyment
The Rental concept allows the full use of the equipment, but does not confer right of ownership. A "Rental" may be defined as the uninterrupted use of equipment for a period of time at an acceptable cost to the user.
Through careful planning, our clients can enjoy the full use of equipment at the lowest cost possible. Our intention is always to provide the most cost efficient structure at the lowest cost possible. Our intention is always to provide the most cost efficient structure at the lowest possible rental.
2. Tax Effects
Rental are 100% tax deductible as an operating expense. The budget is therefore not affected by Capital Expenditure constraints and allows the user flexibility to upgrade within the rental period, or within a fiscal year. Value Added Tax is not capitalized on the agreements but paid monthly on the rental. This provides valuable savings at the time of upgrading as VAT is only paid for the period the equipment is in use.
3. Terms
This can vary, but a five year agreement is the norm, 36 and 48 month periods are also available.
 
3.1 Escalation
 
Normally an escalation rate of approximately the expected rate of inflation is built into the rental structure in order to reduce the cost to the user of a particular system and has important ramifications. It takes into account the fact that, when considering future rentals, inflation will erode the value of money (the most expensive money is today's money), thereby keeping the payment's equal in real terms measured today.
 
3.2 Accounting
 
As a rental is an operating expense, it is not reflected on the balance sheet in any way. Rather it is shown as an operating expense in the income and expenditure statement and noted in the accounts as a commitment.
 
ADVANTAGES OF RENTAL AS OPPOSED TO CASH

Rental
Cash
May escalate installments to suit user
Capital outlay up-front reduces Working capital
VAT payable monthly
VAT payable up-front
Interest calculated on a cash prices before VAT
Interest lost over period as cash- that could have enjoyed an interest return of its own- is paid up-front
100% tax deductible monthly
Deductible by depreciation via balance sheet annually
Operating expenses in the income statement
Appears in the financials as an asset
No capex approval required
Capex approval required for purchase of equipment
No deposit is necessary
Capital outlay up-front
Recoupment Tax avoided
N/A
Off Balance Sheet
On Balance Sheet
Control / contact with user base is secured
Control of user base is lost
Improves equity ratio, current ratrio and return on assets ratio on financial ratio
Has to be capitalised and has an effect on most ratios
Option to upgrade equipment is available free of additional VAT on original equipment and if the same supplier is used for new equipment, a preferential discounted figure is given effectively this is a substantially higher "trade-in" amount
Very little or no value is attached to trade in or 2 nd hand equipment after a period od about 2 years and there- fore capital would effectively be lost when new equipment is purchased as no return on capital would be recognised.