Rental business model: how furniture and appliance rentals earn

A rental company owns the goods and lets customers use them for a monthly fee. The customer avoids a large upfront payment and can return or swap the item. The company takes the cost of buying, delivering, repairing and eventually reselling it.

In India this model is common for furniture, appliances, electronics, bikes and cars, and for office equipment. It suits people who move cities often, such as students and young professionals, and households that prefer a small monthly cost. A live case: RentoMojo, which lets urban households rent furniture and appliances on monthly plans, reported quarterly operating revenue up about 53 per cent to ₹142 crore in its first results since listing.

The company buys an item in bulk, often directly from a manufacturer, and keeps it in a warehouse. A customer picks a plan and pays a refundable security deposit and the first month's rent. The company delivers and installs the item. During the rental, the company handles repairs. At the end, the customer returns the item or continues paying.

The returned item is cleaned and checked. If it is in good shape, it is rented again, which is where most of the profit sits. A single sofa that is rented to three or four customers across its life earns far more than the one-time margin a store would make on selling it. Items too worn to rent are sold at a discount or scrapped.

• Buy: the company pays for the goods up front.
• Rent: the customer pays monthly, often with a deposit.
• Maintain: repairs and replacements are the company's cost.
• Refurbish: returned items are cleaned, repaired and re-listed.
• Dispose: items past their useful life are sold or scrapped.

Rental goods lose value with every month of use. Depreciation spreads the cost of an asset over its expected life. If a washing machine costs ₹30,000 and is expected to last five years, depreciation is ₹6,000 a year. The rent must cover depreciation, repairs, delivery, storage, finance costs and a profit.

Two things can break the model. If items break or are damaged more than expected, their real life is shorter than the accounting life. If customers cancel early, the company has to recover the cost over fewer months. A rental business therefore tracks the average rent per month, the average months rented and the payback period, which is how many months of rent cover the purchase cost.

The accounting life and the real life are not the same thing. A company may depreciate a refrigerator over eight years, but if rented items are moved, cleaned and reinstalled often, the real life may be shorter. When the gap is large, the company has to write off assets early, which cuts profit. Readers can look for a note on the useful life of rental assets and for any change in that assumption.

Because the asset is bought first and paid back slowly, a growing rental company needs a lot of cash. Each new customer adds a purchase today and income spread over years. Growth can therefore hurt cash flow even when each rental is profitable. Profit before tax and operating cash flow can move differently.

The key measures are listed below with made-up values for illustration.

Cash is the other pressure. A company that buys items in bulk before a festive season pays suppliers first and collects rent over many months. Growth is therefore funded by equity, bank loans or asset-backed financing, which adds interest cost. A rental company that shows rising revenue and rising borrowing together deserves a closer look at its payback period.

• Payback period: months of rent needed to recover the item's cost, for example 14 months.
• Utilisation: the share of owned items out on rent, for example 85%.
• Churn: customers who leave each month, for example 3%.
• Revenue per item: monthly rent divided by items out, for example ₹900.
• Refurbishment cost: the spend to make a returned item rentable again.

Companies on Indian Accounting Standards follow Ind AS 116 for leases. For the lessor, which is the rental company, a rental that does not hand over substantially all the risks and rewards of the item is treated as an operating lease. The company keeps the item on its balance sheet as an asset, depreciates it under Ind AS 16 for property, plant and equipment, and records the rent as revenue over the rental period. Ind AS 116 applies from 1 April 2019. Smaller companies on older Indian GAAP use AS 19.

Many companies also keep refundable deposits as a liability. A deposit is not revenue, because it is owed back to the customer. When a story says revenue rose, check whether it counts only rent or also one-time sales of old items.

Revenue recognition follows the same logic. Rent is recognised month by month, not when the customer signs. An item delivered late in a quarter adds little to that quarter and more to the next. This is why a fast-growing rental company can report quarterly growth that trails the number of new customers added.

GST applies to renting goods. Commercial summaries commonly place the hiring of household furniture and appliances under services at 18 per cent, but the treatment can depend on the contract, and some arrangements that transfer the right to use goods can follow the goods' own rate. Rates change, so the official GST notifications are the final word. Customers also pay GST on rent and may not be able to claim credit. This guide is general information, and a professional should be consulted on a specific case.

A subscription gives access to a service, such as software or content, and the cost of serving one more customer is small. A rental ties up a physical item that must be bought, moved and maintained, so each customer needs capital. When reading a rental company's results, look at revenue growth, gross margin after depreciation, the number of active items and customers, and cash flow. Strong revenue with falling depreciation per item is a good sign. Revenue growth funded entirely by new borrowing is a warning.