LEASING LEASING A Contract whereby the owner of

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 use capital. • Leasing is 100 % financing by Lessor. In other form of borrowing, some contribution is required from the borrower. • Lease payments are tax deductible. • Repayment schedule is more flexible as compared to any other form of borrowing. • Existing borrowing covenants in loans may allow lease financing, but restrict further funding.

ADVANTAGES • If the need for asset is short term, asset should be leased out rather than purchasing it. ADVANTAGES FOR LESSOR • Relatively low default risk. • 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 • • 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.