1. STRATEGIC FINANCIAL MANAGEMENT
TOPIC: DIFFERENT TYPES OF LEASING
Presented by
Rajesh Kumar .S.
MBA S4 Part Time
College of Engineering
Thiruvanathapuram
2. Lease is a contractual agreement or transaction in which
party owning an asset called Lessor transfer the right to use
the equipment to the user (lessee) for an agreed period of
time for a periodic payment called rentals with or with out
further payment (premium). At the end of the period the
asset revert back to the lessor.
Lessor is the nominal owner of the asset and possession,
economic use vest in the lessee. Asset required by the
lessee is purchased by the Lessor from manufacturer
selected by the lessee.
3. Lessee uses the asset and pay periodic rentals over a
predetermined period of time. Position of the lessee is
that of person who owns the asset with borrowed
money. The real function of Lessor is not renting of
asset but providing finance and lease finance is
contract of money lending.
4. DIFFERENT TYPES OF LEASING
1) Financial lease and operating lease
2) Sale and lease back and Direct lease
3)Leveraged lease
4) Domestic lease
5) International lease
5. FINANCIAL LEASE:
In finance lease lessor transfers all risk and rewards
incidental to the ownership of the asset to the lessee
whether or not the title is eventually transferred.
This is a method of financing of acquisition an asset similar
to the borrowing for acquisition of an asset. Lessee pays
rentals sufficient to amortize the capital outlay of the lessor.
In this type of leasing lessor is only a financier and not
interested in asset. Hence financial lease is also called full
pay out lease. It enables a lessor to recover his investment
in lease ad derive a profit.
Examples: Ships, Aircrafts, Land and buildings
6. In financial lease Risk means possibility of losses from idle
capacity or technological obsolescence and variation in
return due to change in economic conditions.
Reward means incremental net cash flows that are
generated from the usage of equipment over its economic
life and the realization of anticipated residual value on
expiry of economic life.
7. Features of financial lease
1)Lessee selects the equipment according to his
requirement from manufacturer or distributor
2) Lessee negotiate and settle with the manufacturer the
price, delivery schedule, installation terms of warranty,
maintenance and payment etc
3)Lessor purchase the equipment either directly for the
manufacturer (under straight forward leasing) or from the
lessee after the equipment is delivered (under sale and
lease back)
8. 4)Lessor leases out the equipment to the lessee.
Ownership retained with the lessor while lessee is allowed
to use the equipment
5) Finance lease provide a right or option to the lessee to
purchase the equipment at a future date.
6)Lease period spreads over the expected economic life of
the asset. Lease is originally for a non cancelable period
called primary lease period. In this period lessor seeks to
recover this initial investment along with some profit. During
this period cancellation of lease possible at a high cost.
9. 7)Lease can subject to renewal for secondary period during
which rental are substantially low.
8) Lessee is entitled to exclusive and peaceful use of asset
during the entire lease period and pays rentals and
complies with the terms of lease.
9)As equipment is chosen by the lessee responsibility of
suitability, risk of obsolescence, liability of repair
maintenance of equipment rest with he lessee.
10. 2) Operating lease:
In operating lease lessor does not transfer all the risk and
reward incidental to the ownership of the asset and cost of
the asset is not fully amortized during he primary lease
period. Lessor provides service attached to the leased
asset like maintenance, repairs, technical advice etc.
Examples: Computers, office equipment, truck etc.
11. Features of operating lease:
(i)Lease period shorter than the economic life of leased asset. It may
be for hour, day, week or monthly basis.
(ii) Since the lease periods are shorter than the expected life of the
asset, lease rentals are not sufficient to totally amortize the cost of
assets.
(iii) Lessor does not rely on the single lessee of recovery of his initial
investment. Lessor bears the risk of obsolescence since lessee is free
to cancel the lease at any time.
(iv) Operating lease normally include a maintenance clause requiring
the lessor to maintain the leased asset and provide serves as
insurance, support staff etc.
12. 3)Sale and lease back and direct lease
This type of leasing is an indirect form of leasing. The
owner of the asset sells it to a leasing company (lessor)
that leases it back to the owner (lessee)
Examples Sale and ease back of safe deposits vaults by
banks. Bank sell the vaults in their custody to a leasing
company at a market price substantially higher than the
book value and leasing company in turn offers these
lockers on a long term basis too bank., the bank sub
leases lockers to its customers.
13. Direct lease are of two types
(i) Bipartite lease
(ii) Tripartite lease
In Bipartite lease there are two parties (i) equipment –suppler-cum-
lessor (ii) Lessee
This type of lease is same as that of operating lease with inbuilt
facilities kike up gradation of configuration etc. Lesser maintains
the asset and replace with similar equipment if any problem arise.
In Tripartite lease, there are three parties, equipment supplier,
lessor, lessee. In this type of lease equipment supplier arranges
lease finance in various forms.
Providing reference to about the customer to the leasing company
Negotiating he terms of lease with the customer and completing all
formalities on behalf of leasing company
14. 4) Domestic lease and international lease.
In domestic lease all parties to the agreement namely
equipment supplier, lessor, lessee domiciled in the
same country.
If parties to the lease transaction domiciled in different
countries it is known as International lease.
5) Import lease:
In import lease lessor and lessee are domiciled in same
country but equipment supplier is located in different
country. Lessor imports the asset and leases it to the
lessee.
15. 6)Cross-border lease:
In cross border lease lessor and lessee are domiciled in
different countries.
(7)Leveraged lease:
In leveraged lease lessor act as an equity participant
supplying a fraction of the total cost of the asset while
lender supplies major part of the asset.
Reference: Financial Management (Khan & Jain)
