Elements of Leasing
Leasing is one of the important and popular parts of asset based finance. It consists of the
following essential elements. One should understand these elements before they are going to
study on leasing.
1. Parties: These are essentially two parties to a contract of lease financing, namely
the owner and user of the assets.
2. Leaser: Leaser is the owner of the assets that are being leased. Leasers may be
individual partnership, joint stock companies, corporation or financial institutions.
3. Lease: Lease is the receiver of the service of the assets under a lease contract.
Lease assets may be firms or companies.
4. Lease broker: Lease broker is an agent in between the leaser (owner) and lessee.
He acts as an intermediary in arranging the lease deals. Merchant banking divisions
of foreign banks, subsidiaries indian banking and private foreign banks are acting
as lease brokers.
5. Lease assets: The lease assets may be plant, machinery, equipments, land,
automobile, factory, building etc.
Term of Lease
The term of lease is the period for which the agreement of lease remains for operations.
The lease term may be fixed in the agreement or up to the expiry of the assets.
The consideration that the lesae pays to the leaser for lease transaction is the rental.
Type of Leasing
Leasing, as a financing concept, is an arrangement between two parties for a specified
period. Leasing may be classified into different types according to the nature of the
agreement. The following are the major types of leasing as follows:
(A) Lease based on the term of lease
1. Finance Lease
2. Operating Lease
(B) Lease based on the method of lease
1. Sale and lease back
2. Direct lease
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(C) Lease based in the parties involved
1. Single investor lease
2. Leveraged lease
(D) Lease based in the area
1. Domestic lease
2. International lease
1. Financing lease
Financing lease is also called as full payout lease. It is one of the long-term leases
and cannot be cancelable before the expiry of the agreement. It means a lease
for terms that approach the economic life of the asset, the total payments over
the term of the lease are greater than the leasers initial cost of the leased asset.
For example: Hiring a factory, or building for a long period. It includes all
expenditures related to maintenance.
2. Operating lease
Operating lease is also called as service lease. Operating lease is one of the short-term
and cancelable leases. It means a lease for a time shorter than the economic life of
the assets, generally the payments over the term of the lease are less than the leaser’s
initial cost of the leased asset. For example: Hiring a car for a particular travel. It
includes all expenses such as driver salary, maintenance, fuels, repairs etc.
3. Sale and lease back
Sale and lease back is a lease under which the leasee sells an asset for cash to
a prospective leaser and then leases back the same asset, making fixed periodic
payments for its use. It may be in the firm of operating leasing or financial leasing.
It is one of the convenient methods of leasing which facilitates the financial
liquidity of the company.
4. Direct lease
When the lease belongs to the owner of the assets and users of the assets with
direct relationship it is called as direct lease. Direct lease may be Dipartite lease
(two parties in the lease) or Tripartite lease. (Three parties in the lease)
5. Single investor lease
When the lease belongs to only two parties namely leaser and it is called as single
investor lease. It consists of only one investor (owner). Normally all types of
leasing such as operating, financially, sale and lease back and direct lease are
coming under this categories.
6. Leveraged lease
This type of lease is used to acquire the high level capital cost of assets and equipments.
Under this lease, there are three parties involved; the leaser, the lender and the lessee.
Under the leverage lease, the leaser acts as equity participant supplying a fraction of
the total cost of the assets while the lender supplies the major part.
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7. Domestic lease
In the lease transaction, if both the parties belong to the domicile of the same
country it is called as domestic leasing.
8. International lease
If the lease transaction and the leasing parties belong to the domicile of different
countries, it is called as international leasing.
Advantages of Leasing
Leasing finance is one of the modern sources of finance, which plays a major role in the
part of the asset based financing of the company. It has the following important advantages.
1. Financing of fixed asset
Lease finance helps to mobilize finance for large investment in land and building,
plant and machinery and other fixed equipments, which are used in the business
2. Assets based finance
Leasing provides finance facilities to procure assets and equipments for the
company. Hence, it plays a important and additional source of finance.
Leasing finance is convenient to the use of fixed assets without purchasing. This
type of finance is suitable where the company uses the assets only for a particular
period or particular purpose. The company need not spend or invest huge amount
for the acquiring of the assets or fixed equipments.
4. Low rate of interest
Lease rent is fixed by the lease agreement and it is based on the assets which are
used by the business concern. Lease rent may be less when compared to the rate
of interest payable to the fixed interest leasing finance like debt or loan finance.
Lease formalities and arrangement of lease finance facilities are very simple and
easy. If the leaser agrees to use the assets or fixed equipments by the lessee, the
leasing arrangement is mostly finished.
6. Transaction cost
When the company mobilizes finance through debt or equity, they have to pay
some amount as transaction cost. But in case of leasing finance, transaction cost
or floating cost is very less when compared to other sources of finance.
7. Reduce risk
Leasing finance reduces the financial risk of the lessee. Hence, he need not buy
the assets and if there is any price change in the assets, it will not affect the lessee.
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8. Better alternative
Now a days, most of the commercial banks and financial institutions are providing
lease finance to the industrial concern. Some of the them have specialised lease
finance company. They are established to provide faster and speedy arrangement
of lease finance.