Lease FinancingLease Financing

MeaningMeaningLeasing is an arrangement that provides a firm with the use of and control over the assets without buying and owing the same. It is a form of renting assets. Lease is a contract between the owner of the asset(lessor) and the user of the asset called the lesse, wherby the lessor gives the right to use the asset to the lessee over an agreed period of time for a consideration called the lease rental.

Types of LeasingTypes of LeasingOperating or Service LeaseFinancial Lease

Operating LeaseOperating LeaseIt is a short term lease on a period

to period basis.The lease is usually cancellable at

short notice by the lessee.The lessee usually has the option of

renewing the lease after the expiry of lease period.

The lessor is generally responsible for maintenance, insurance and taxes of the asset.

Financial LeaseFinancial LeaseA lease is classified as finacial lease if it ensures the lessor for amortisation of the entire cost of investment plus the expected return on the capital outlay during the term of the lease.

A financial lease is for longer period of time.

A financial lease usually provides the lease an option of renewing the lease for further period at a nominal rent.

It is usually non cancellable by the lesse prior to its expiration date.

Advantages of leasing to the Advantages of leasing to the LesseeLessee Avoidance of Initial Cash Outlay Minimum Delay Easy Source of Finance Shifting the Risk of Obsolesence Enhanced Liquidity Conserving Borrowing Capacity Tax Planning and Differential Tax Advantage Higher Return on Capital Employed Convenience and Flexilbility Certainity No Floatation Cost No Disposal Problem Lesser Administrative Costs

Limitations of Leasing for the Limitations of Leasing for the LesseeLesseeLoss of Moatorium PeriodRisk of Being Deprived of the Use

of AssetNo Alteration of Change in AssetLoss of Ownership IncentivesPenalties on Termination of

LeaseLoss of Salvage Value of the

Asset

Advantages of Leasing to the Advantages of Leasing to the LessorLessorHigher ProfitsTax BenefitsQuick ReturnsIncreased Sales

Limitations for the LessorLimitations for the Lessor

Higher ProfitsRisk of obselenceCompetitive MarketPrice Level ChangesManagement of Cash FlowsIncreased Cost due to Loss of

User BenefitsLong Term Investment