What is the Difference Between a Leasing Company and a Bank Guarantee Leasing Company?
There is a world of difference between a leasing company and a company that leases Bank Guarantees. Below are two separate overviews regarding these companies.
What is a Leasing Company?
Leasing companies can be found all over the world. The most popular are financial leasing companies. These companies finance the lease of assets. An obvious example is leasing a car. If the purchaser cannot fund the full value of a car, they can effectively lease the car.
The company selling or leasing the car will have their own leasing company. If not, they will work with a finance/leasing company. The purchaser or lessee will pay for the car over a set period. Usually monthly payments with interest built in. All risks and benefits are for the lessee.
Other companies can lease other vehicles for a set period of time. Houses and boats may be leased for a set period of time. Heavy duty machinery for construction projects is another example. There are many leasing companies that lease different types of assets for an agreed period. Thus, each leasing company is a specialist in their field.
What is a Bank Guarantee Leasing Company?
Interestingly, there are no companies that have Bank Guarantee leasing as their core business. Companies involved in Bank Guarantee leasing will lend part of their balance sheet to this business. In the Leased Bank Guarantee market, these companies are referred to as Providers.
Typically, companies that lease out Bank Guarantees are Sovereign Wealth Funds, Hedge Funds, Private Equity Funds and the larger Family Offices. These companies have massive balance sheets. Accordingly, they have access to a large portfolio of assets.
They can only do so by engaging their nominated bank as their Issuing Bank, pledging assets to that bank (typically liquid assets, cash or gold) and instructing the issue of a Bank Guarantee (or Demand Guarantee) where such assets act as pledge.
As with all portfolios some assets return less than other assets. Medium-Term Notes, MTN’s) and Government Bonds are good examples. The providers will use these assets as security to lease Bank Guarantees. The average yearly return is 6.5% which they add to the current return of the assets. The combined return makes good reading on the balance sheet.
The type of leased Bank Guarantee is usually a Demand Bank Guarantee. This is the only Bank Guarantee that can be monetised and used for project and other types of finance. Companies are finding it more and more difficult to obtain funding from traditional financiers such as banks. Leased Demand Bank Guarantees is an innovative way of raising finance.
Differences and Similarities
Both company’s lease assets. Leasing companies lease what is known as concrete assets. The companies that lease Bank Guarantees lease financial instruments. Both companies enjoy a rate of return on leasing their products. Leasing companies will take a deposit plus monthly payments.
Bank Guarantee leasing is different. It is usually for monetisation purposes. The lessee will put down a deposit of circa 1% of face value. They will also pay legal and administrative fees. The full years interest and leasing fee will be taken up-front. The lessee will be left with the balance of the loan or credit line.
Many leasing company’s target the consumer. Bank Guarantee leasing is targeting corporate projects. The size of each Bank Guarantee lease will be in the tens of millions. Consumer leasing will be the hundreds or thousands.
Leasing companies provide finance for individuals and companies. Bank Guarantee leasing is strictly for companies. Leasing companies make finance available. Companies leasing Bank Guarantees, are part of the process of making finance available.