LEASING
LEASING
• A Contract whereby the owner of the asset
(The Lessor) grants the exclusive right to
another party( The Lessee) to use the asset for
an agreed period of time.
• Leasing refers to borrowing of asset rather
than borrowing of funds to purchase that
asset.
LEASING
• Leasing company gets rent if the ownership of
asset to be borrowed is to be remain with the
company.
• Leasing company gets installments, which are
deducted from the asset price if the asset to
be borrowed has to be transferred to the
lessee.
ADVANTAGES FOR THE LESSEE
• Lessee doesn’t have to • Lease payments are tax
use capital.
deductible.
• Repayment schedule is
more
flexible
as
• Leasing is 100 %
compared to any other
financing by Lessor. In
form of borrowing.
other
form
of
borrowing,
some • Existing
borrowing
contribution is required
covenants in loans may
from the borrower.
allow lease financing,
but restrict further
funding.
ADVANTAGES
• If the need for asset is ADVANTAGES FOR LESSOR
short term, asset should • Relatively low default
be leased out rather
risk.
than purchasing it.
• Administratively its
cheaper than providing
loan to clients.
TYPES OF LEASE
• 1. OPERATING LEASE
• Short term arrangement
• Lessor may lease the
same asset to different
lessee and earn return on
it.
• Lease
cancellation
contains minor or no
penalty.
• Lessor faces the risk of
obsolescence.
• This concept is applicable
on renting lands, building,
and
use
of
office
equipment and vehicles.
• Operating lease refers to
“Full Service Lease”.
Maintenance, insurance is
provided by the Lessor.
2. FINANCE LEASE
• Long term arrangement.
• Lessor plays the role of financer.
• Lessor gets lease payments which are
deducted from asset value and ownership is
transferred to lessee on completion of lease
contract.
• This refers to “NET LEASE” means cost of
maintenance and insurance is borne by the
Lessee.
3. SALE AND LEASE BACK
•
•
A firm owning an asset sells it to another
firm and immediately leases back.
The advantage of this type of lease to the
seller is that he receives cash on sale which
he can reinvest in business and earn return
on it and still eligible to use the asset by
paying nominal rent payment.
4. DIRECT LEASE
• The firm acquires the direct right to use an
asset which it does not own previously.
• This type of lease may be arranged by
manufacturer or a financial institution.
• Financing companies or independent leasing
companies enter into business of acquiring
assets on behalf of their clients.
• Lessor has the ownership till maturity and can
confiscate the asset in case of default.
LEVERAGED LEASE
• Three parties are involved, Lessor, lessee and
the financing company(financial institution).
• Lessor is the owner of the asset but acquires it
partly by contributing 15 – 30 % of asset value
and remaining 70 % is borrowed from
financial institution.
• Finance companies and commercial banks
participate in such leases.
LEVERAGED LEASE
• This type of lease is used for very expensive
assets such as aircrafts, ships, power stations etc.
• Financial institutions secure their loans by taking
charge on leased assets.
• Duration of leveraged lease is 15 years and
above.
• Lessor being an owner of asset has an advantage
of tax deductions on reporting depreciation of
asset and interest payments on loans.
CROSS BORDER LEASE
Lessor in one country leases asset to lessee in
another country.