Lease – Lease financing, Terms to be known, Types of Lease

Lease – A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. Leasing is a general contract between the owner and user of the asset over a specified period of time. The asset is purchased initially by the lessor (leasing company) and thereafter leased to the user (lessee company) which pays a specified rent at periodical intervals. Thus, leasing is an alternative to the purchase of an asset out of own or borrowed funds. Moreover, lease finance can be arranged much faster as compared to term loans from financial institutions.

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Lease financing :

Lease financing is one of the popular and common methods source of finance based on assets, which is the alternative to the loan finance. Lease is a contract under which one party, the lessor (owner) of an asset agrees to grant the use of that asset to another (lessee) in exchange of periodic rental payments. It is one of the best medium and long term source of finance. As per Oxford dictionary Lease means A contract by which one party conveys land, property, services, etc. to another for a specified time, usually in return for a periodic payment.

Terms to be known :

(1) Lessor :

A lessor is a person or an organization that owns an asset and leases the asset in consideration of some periodical payments.
Lessor may be individual partnership, joint stock companies, corporation or financial institution.

(2) Lessee :

Lessee is person to whom to asset has been leased for a periodical payments. Lessee may be an individual , HUF , company etc.

(3) Lease broker :

Lease broker is an agent in between the lessor (owner) and lessee. He acts as an intermediary between the two parties in arranging the lease deals. Merchant banking divisions of foreign banks, subsidiaries indian banking and private foreign banks are acting as lease brokers.

(4) Lease assets :

They may be Plant and machinery , building, land or any property etc.,

(5) Tenure / Term :

It’s the period for which the lease deed has been executed. Generally it is mentioned in lease agreement/ deeds.

(6) Rental payments :

This is the periodical payments made by lessee to the lessor as a consideration for using the property .

Types of Lease :

(A) Lease based on the term

Operating Lease

Operating Lease: A lease is classified as an operating lease if it does not secure for the lessor the recovery of capital outlay plus a return on the funds invested during the lease term. Normally, these are callable lease and are cancelable with proper notice.

The term of this type of lease is shorter than the asset’s economic life. The leasee is obliged to make payment until the lease expiration, which approaches useful life of the asset.

An operating lease is particularly attractive to companies that continually update or replace equipment and want to use equipment without ownership, but also want to return equipment at lease end and avoid technological obsolescence.

Finance Lease

Finance Lease: In contrast to an operating lease, a financial lease is longer term in nature and non-cancelable. In general term, a finance lease can be regarded as any leasing arrangement that is to finance the use of equipment for the major parts of its useful life. The lessee has the right to use the equipment while the lessor retains legal title. It is also called capital lease, at it is nothing but a loan in disguise.

Thus it can be said, a contract involving payments over an obligatory period of specified sums sufficient in total to amortise the capital outlay of the lessor and give some profit.

(B) Lease based on the method

  • Sale and lease back
  • Direct lease

(C) Lease based in the parties involved

  • Single investor lease
  • Leveraged lease

(D) Lease based in the area

  • Domestic lease
  • International lease

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