Meaning Of Lease Financing: Leasing is a rental contract where
by lessee (user of assets) obtained the asset for use from the lessor (owner of
the assets) in exchange of series of fixed obligation.
Comprehensive Definition: Leasing is a long term rental
agreement in which one party (owner of the asset) gives exclusive right to
other party (user of asset) to use that asset over some specified time period
in return for periodic payment over the lease agreement.
Features Of Leasing: In the light of above definitions
following are the main features of leasing given as under;
·
Rental Agreement: Lease is the long term rental
agreement.
·
Advanced Payment: As lease agreement is executed lessee
has to pay first installment in advance.
·
Net Lease: Under net lease all the costs, like
repairs, taxes insurance etc. are paid by the lessee (user of asset).
·
Cancellable Or Non-Cancellable: Lease contract may be cancellable or
non-cancellable.
·
Periodic Payment: Lease payment are made periodically
(monthly, semi annually or annually) over the life of lease agreement.
·
100% Financing: Leasing provides 100% financing.
·
Salvage Value: From lessor’s point of view he get
salvage value at the termination of agreement.
·
Options: When lease contract is terminated.
1) The lessee can review the lease
agreement.
2) The lessee revert asset to lessor.
3) The lessor gives option to the lessee
to purchase leased asset at salvage value.
·
Preserve Cash: Lessee can preserve cash for other
uses as well.
·
Two Parties Are Involved: Under leasing there are two parties
are involved.
1) Lessor (owner of asset) which is
being leased.
2) Lessee is the (user of asset) which
takes assets for specified period of time and make rental payment.
Types Of Lease: Following are the some main types of
lease which are given as under;
1)
Operating/Service Lease.
2)
Financial/Capital Lease
3)
Sales And Lease Back
4)
Direct Lease
5)
Leveraged Lease
Now we can
discuss all of the above terms one by one given as under.
Operating/Service Lease: Operating lease can be define as
operating is the short term lease arrangement because lease period is less than
established economic life of the leased asset. A short term, cancellable, non
fully amortized lease that contains provision for repair and maintenance services.
Features Of Operating Lease: Following are the some main features
of operating lease given as under;
1) It is short term lease used to
finance equipment such as computers, tankers etc.
2) It contain a provision for service of
maintenance and repair.
3) Operating lease is extended for short
period i.e. 5 year or less then 5 year.
4) It is cancellable and non fully
amortized.
5) Under operating lease the useful life
of asset is longer then the term of lease.
6) At the end of contract the lessor
gives three options to lessee.
1)
To Purchase
2)
Either To Return
3)
Renew The Agreement
Financial Lease/Capital Lease: Financial lease can be define as “a
long live, non cancellable, fully amortized lease that contain no provision for
repair and maintenance is called finance or capital lease”.
Features: Following are the some main features
of financial lease given as under;
1) It is long lived lease contract.
2) It is fully amortized.
3) It is non cancellable.
4) At financial lease title of the asset
transfer to the lessee.
5) It is commonly used for leasing land,
building etc.
The manufacture
company gives the goods and services to the leasing company known as lessor. Then
the lessee obtain the assets from lessor on the basis of return to pay the
fixed obligation till the maturity and it is not cancellable.
Leveraged Lease: Leveraged lease is basically derived
from financial lease which have fixed return like interest preferred etc. three
parties are involved in this arrangement i.e. lessor, lessee and manufacturer. In
this case lessor obtained the goods from manufacture company and transfer it to
the lessee. The agreement exist between lessor and lessee and lessee have no
contract with manufacture. In return lessee pay fixed obligation to the lessor
(leasing company) till maturity out of these payment the lessor given 80%
amount to the manufacture while remaining 20% will go to the lessor account or
leasing company.
Sales And Lease Back Arrangement: A lease under which lessee sells an
asset for cash to a prospective lessor and then leases back the same asset
making fixed periodic payment for its use is caused sales and lease back
arrangement. In this case title of the asset transfer to the leasing company
(lessor).
Features: Following are the main features of
sales and lease back arrangement which are given as under;
1) The assets sold by the firm may be
old or now.
2) A firm usually an old assets fully depreciated
and then lease it back.
3) The asset are sold at market value.
4) Sale and lease back arrangement is
fully amortized means paid in series of equal installments.
Direct Lease: L.J Gilman define it as “a lease
under which a lessor owns or acquires the assets that are leased to a given
lessee. It is type of financial leasing. In this case place an order with
manufacture.
Advantages Of Leasing: Following are the some advantages of
leasing given as under;
1) Leasing conserves working capital
condition of lessee.
2) Lease financing transfer the risk of obsolescent
to the lessor.
3) Lease financing involves 100%
financing by the lessor.
4) It also provide the tax advantage to
the lessee.
Disadvantages Of Leasing: Following are the some disadvantages
of leasing.
1) Cost of leasing is very high because
it involves some hidden cost.
2) Legal ownership makes the big
differences when lease period is expired because lessor gets salvage value of
the leased assets at the expiration date.
3) In lease arrangement the lessee
cannot bring any change in the leased asset without approval of the lessor.