Lease Financing

What is LEASE?
A lease is a contract whereby the owner of an
asset grant to another party the exclusive right to
use the asset usually for an agreed period of time
in return for the payment of rent.

Parties to a Lease
Lessee--User of the Asset
Lessor--Owner of the Asset
Trustee--Represents the Creditors with a Third
Party Lease

ABOUT LEASE
FINANCE
Lease financing is one of the important sources of
medium- and long-term financing where the
owner of an asset gives another person, the right
to use that asset against periodical payments.
The owner of the asset is known as lessor and the
user is called lessee.

CHARCTRISTICS

In lease transaction the lessee does not get the

ownership of asset but gets as right only to use the
asset.
The amount regularly paid for the use of such asset is
called lease rental. As it is treated as rent it is revenue
expenses.
Lessee is responsible for the maintenance of asset.
Such transaction can we made for both immovable and
movable properties.
When prices of asset are constantly rising due to
inflation the lease arrangement keeps the lessee free
from effect of price rise. His rent remain the same when
price rise or fall.

ADVANTAGES
Provides full finance : provision of 100% finance is main
benefit of leasing . if the lease borrows money from banks to
purchase the asset he gets 70 to 80% finance only. While in
case of lease he does not have to make any provision for
finance. He gets 100% finance. He will be required to pay rent
only.
Flexible : it is flexible In the sense that risk of obsolesecne
because he is not of financial lease, agreement is for the whole
useful life of asset. The lessee is required to make the rental
payment for the whole period even if the asset become
obsolete.

 Save from recurring cost of finance : In case asset are taken on

lease, the firm will not have to incur the cost of raising finance
frequently whenever it wants to purchase any asset.
Absence of restriction : - it is main advantage of leasing. If
money is borrowed from banks or other financial institution , they
would put restriction on borrower as regard further amt. to be
borrowed dividend etc.. but in case of lease it is absolutely free
from all such restriction.
Tax benefit : - both the parties get certain deduction. The lessee
gets full rent as deduction. This is higher then depreciation
charges because it includes interest and some amt. toward profit
of the lesser
Increase the capacity to borrows : - the lesser does not show the
asset in his balance sheet nor the future liability for payment of
rentals. Hence less debts equity ratio remains law and he will be
able to borrow more funds in future.

 Useful is case if fast changing technology : - it is particularly

useful to the lessee in case were fast technology change are
taking i.e reason why more and more business resort to
leasing in case of very costly and expensive machines.
Faster and cheaper credit : - its is faster than if money is to
be borrowed from banks or other financial institution.
Leasing company promptly sanction the request and it is more
accommodative in respect of terms of financing.

DISADVANTAGES
No benefit of residential value :- when a firm purchase an
asset, it is has full right to value of asset at the end of its useful
life. But the benefit is not available to the lessee in case of
lease.
No benefit of ownership : - the lessee does not get any
benefit, which would be available if he were the owner of
asset e.g price of an asset has increased considerably, the
lessee cant sell it.

 High cost of leasing : - It is experience that leasing is more costly than

borrowing. The rate of interest charged very much higher than that on
borrowing. This is because the lease rental includes the cost of asset, some
profit to the lesser payment for the employing experts by the lesser and
also payment for related service. Of course if the lesser is making purchase
of asset in large scale gets the benefit of the lower cost and this can be
form of lower rent.
Not flexible : - In case the lessee is not able to arrange for finance for
buying an asset he will have to lease the asset. In that case, the amt. of
lease rent is fixed in advance for the whole period. If the rate of interest
declines in market the borrowing can be returned and interest can be
saving. But that is not possible in a change, because rent amt. is not
changed.

TYPES OF LEASING
Operating Leases
A lease in which all risks and rewards related to
asset ownership remain with the lessor for the
leased asset is called operating lease. In this lease,
the asset is returned by the lessee after using it for
lease term agreed upon.

Features of Operating Leases

The lease term is much lower than the economic
life of the asset.
The lessee has the right to terminate the lease by
giving a short notice and no penalty is charged
for that.
The lessor provides the technical knowhow of the
leased asset to the lessee.
Risks and rewards incidental to the ownership of
asset are borne by the lessor.
Lessor has to depend on leasing of an asset to
different lessee for recovery of his/her
investment.

 Financial Leases
In financial lease (Also known as capital lease), the risks
and rewards related to ownership of asset leased are
transferred to the lessee.
Features of Financial Leases
A finance lease is a device that gives the lessee a right
to use an asset.
The lease rental charged by the lessor during the primary
period of lease is sufficient to recover his/her investment.
The lease rental for the secondary period is much
smaller. This is often known as peppercorn rental.
Lessee is responsible for the maintenance of asset.
No asset-based risk and rewards is taken by lessor.
Such type of lease is non-cancellable; the lessors
investment is assured.

Difference between Financial leases and

Operation leases.
Financial leases

Operation leases

Ownership transfer option at the

end of the lease period is there
with the lessee. Title might or
might not be transferred.
Financial lease is treated like
loan generally.
Financial lease allows the lessee
to have a purchase option at
less than the fair market value
of the asset.
In financial lease, lessee bears
insurance, maintenance and
taxes.

Ownership of the asset

remains with the lessor for
the entire lease period.
Operating lease is treated
generally like renting.
In operating lease, the
lessee does not have any
option to buy the asset
during the lease period.
Lessee pays only the
monthly lease payment in
operating lease.

Why the Lease Financing

is important in this era?
Leasing is big business in the 21st century with over billions of
dollars worth of commercial equipment financing being done
by American business annually. Whether it is commercial
equipment leasing or a sale lease back, both are increasingly
being used to acquire liquid funds for a company.
Financing through lease financing company can help your
business conserve working capital. And, because commercial
equipment financing frees up your working capital for other
investments or profit making activities it just makes sense to
be leasing rather than buying.

Thank you
Presented By
Urvashi Vashisht
Raj Kumar
Ghirender
Ishita Sharma
Tammana Arora
Kanishk Rohilla