Department of Management Studies
Prior to 1950, leasing was not popular as it concentrated only on real estates.But
now it concentrate almost all types of fixed assests.In India the equipment
leasing services was introduced by leasing company of India Ltd in 1993.
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
The owner of the asset is known as lessor and
the user is called lessee.
The periodical payment made by the lessee to
the lessor is known as lease rental.
Under lease financing, lessee is given the
right to use the asset but the ownership lies
with the lessor and at the end of the lease
contract, the asset is returned to the lessor or
an option is given to the lessee either to
purchase the asset or to renew the lease
“Lease is a contract, whereby the owner of an asset (lessor) grants to
another party (lessee) the exclusive right to use the asset usually for an
agreed period of time in return for payment of rent”
– James C Vanhore
“Leasing separates ownership and use as to economic activities and
facilitates asset use without ownership ”
– Miller, M.H. and C.W. Uptron
STEPS IN LEASING
DECISION ON ASSET
The lessee makes a decision on the type of asset required for the business activities.
For instance, if machinery is required, he has to decide about the design
specifications and other features of the machine.
DECISION ON LESSOR
The lessor has to make a list of prospective lessor. He may conduct cost
benefit analysis of selecting of particular lessor. He will select that lessor who is
most cost effective in terms of delivery of machinery, rentals, etc.
The lessee enters into a lease agreement with a lessor. The agreement terms and
conditions such as:
The lease period
The timing and amount of lease rentals
Penalty for default
Repairs and servicing stipulations as to who is responsible, either lessee or
Renewal of lease agreement
DELIVERY OF ASSET
Once the lease agreement is signed, the lessor contacts the asset
provider/manufacturer, (if he does not readily possess one). The lessor makes
payment to the asset provider. He then delivers the asset to the lessee.
TYPES OF LEASING
1. Financial Lease
Financial leasing is a contract involving payment over a longer period. It is a
long-termlease and the lessee will be paying much more than the cost of the
property or equipment to the lessor in the form of lease charges. It is irrevocable.
In this type of leasing the lessee has to bear all costs and the lessor does not
render any service.
2. Operating Lease
In an operating lease, the lessee uses the asset for a specific period. The lessor
bears the risk of obsolescence and incidental risks. There is an option to either
party to terminate the lease after giving notice. In this type of leasing
• lessor bears all expenses
• lessor will not be able to realize the full cost of the asset
• specialized services are provided by the lessor.
• This kind of lease is preferred where the equipment is likely to suffer
3. Leveraged and non-leveraged leases
In leveraged and non-leveraged leases, the value of the asset leased may be of a
huge amount which may not be possible for the lessor to finance. So, the lessor
involves one more financier who will have charge over the leased asset.
4. Conveyance type lease
In Conveyance type lease, the lease will be for a long-period with a clear
intention of conveying the ownership of title on the lessee.
5. Sale and leaseback
In a sale and leaseback, a company owning the asset sells it to the lessor. The lessor
pays immediately for the asset but leases the asset to the seller. Thus, the seller of the
asset becomes the lessee. The asset remains with the seller who is a lessee but the
ownership is with the lessor who is the buyer. This arrangement is done so that the
selling company obtains finance for running the business along with with the asset.
6. Full and non pay-out lease
A full pay-out lease is one in which the lessor recovers the full value of the leased asset
by way of leasing. In case of a non pay-out lease, the lessor leases out the same asset
over and over again.
7. Specialized service lease
The lessor or the owner of the asset is a specialist of the asset which he is
leasing out. He not only leases out but also gives specialized personal service to
the lessee. Examples are electronic goods, automobiles, air-conditioners, etc.
8. Net and non-net lease
In non-net lease, the lessor is in charge of maintenance insurance and other
incidental expenses. In a net lease, the lessor is not concerned with the above
maintenance expenditure. The lessor confines only to financial service.
9. Sales aid lease
In case, the lessor enters into any tie up arrangement with manufacturer for the
marketing, it is called sales aid lease.
10. Cross border lease
Lease across national frontiers are called cross border lease, Shipping, air service,
etc., will come under this category.
11. Tax oriented lease
Where the lease is not a loan on security but qualifies as a lease, it will be
considered a tax oriented lease.
12. Import Lease
In an Import lease, the company providing equipment for lease may be located in
a foreign country but the lessor and the lessee may belong to the same country.
The equipment is more or less imported.
13. International lease
Here, the parties to the lease transactions may belong to different countries which
is almost similar to cross border lease.
The advantages of lease financing from the point of view of lessor are
Assured Regular Income:
Lessor gets lease rental by leasing an asset during the period of lease which is
an assured and regular income
Preservation of Ownership:
In case of finance lease, the lessor transfers all the risk and rewards incidental
to ownership to the lessee without the transfer of ownership of asset hence the
ownership lies with the lessor.
Benefit of Tax:
As ownership lies with the lessor, tax benefit is enjoyed by the lessor by way of
depreciation in respect of leased asset.
The business of leasing is highly profitable since the rate of return based on lease
rental, is much higher than the interest payable on financing the asset.
High Potentiality of Growth:
The demand for leasing is steadily increasing because it is one of the cost efficient
forms of financing. Economic growth can be maintained even during the period of
depression. Thus, the growth potentiality of leasing is much higher as compared to
other forms of business.
Recovery of Investment:
In case of finance lease, the lessor can recover the total investment through lease
The advantages of lease financing from the point of view of lessee are discussed
Use of Capital Goods:
A business will not have to spend a lot of money for acquiring an asset but it can use
an asset by paying small monthly or yearly rentals.
A company is able to enjoy the tax advantage on lease payments as lease payments
can be deducted as a business expense.
Leasing is a source of financing which is cheaper than almost all other sources of
Lessee gets some sort of technical support from the lessor in respect of leased
Leasing is inflation friendly, the lessee has to pay fixed amount of rentals each year
even if the cost of the asset goes up.
After the expiry of primary period, lessor offers the lessee to purchase the assets—
by paying a very small sum of money.
Lessor suffers from certain limitations which are discussed below:
Unprofitable in Case of Inflation:
Lessor gets fixed amount of lease rental every year and they cannot increase
this even if the cost of asset goes up.
Sales tax may be charged twice:
First at the time of purchase of asset and second at the time of leasing the
Greater Chance of Damage of Asset:
As ownership is not transferred, the lessee uses the asset carelessly and there
is a great chance that asset cannot be useable after the expiry of primary period
The disadvantages of lease financing from lessee’s point of view are given
Finance lease is non-cancellable and even if a company does not want to use the
asset, lessee is required to pay the lease rentals.
The lessee will not become the owner of the asset at the end of lease agreement
unless he decides to purchase it.
Lease financing is more costly than other sources of financing because lessee has
to pay lease rental as well as expenses incidental to the ownership of the asset.
Understatement of Asset:
As lessee is not the owner of the asset, such an asset cannot be shown in the
balance sheet which leads to understatement of lessee’s asset.