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ADVANTAGES & DISADVANTAGES
FINANCE INSTITUTION WHICH LEASE
Leasing was introduced in the United States of America
during 1940s and 1950s. It is estimated that
Leasing industry in the USA finances about 25 per cent of
capital goods acquisition. The concept of leasing was
pioneered in India by the SPIC group which established
“First Leasing Company of India Limited” in 1973 at
Later on 20th Century Leasing Company Limited was set
up in Mumbai. Now, IFCI, IDBI, ICICI, State Bank of
India, SIDCs, Sundaram Finance and other entities are
running leasing companies in our country.
A lease is a legal agreement amongst two parties
known as lessor (owner of the asset) and a lessee
(user of the asset). Lessor grants a temporary
possession to the lessee to use his/her property or
asset such as land and building against some
monetary compensation for a certain period as
mentioned in an agreement of lease.
Lessor: Lessor is the holder or the
owner of the property or land to
be leased. It can be an individual
or any legal entity.
Lessee: The person who is taking
the property or land in a lease by
paying money for a certain period
is termed as lessee. Any person or
entity who is in need of property
or land can be a lessee.
TYPES OF LEASE
SALE AND LEASE BACK
SINGLE INVESTOR LEASE
It is long term arrangement which is non-cancellable
during primary lease period which is generally full
economic life of leased asset.
PRIMARY PERIOD: It is non-cancellable
period and in this period lessor recover his
total investment through lease rental.
SECONDARY PERIOD: It is smaller than that
of primary period. This is often known as
1. FINANCIAL LEASE
All risk & reward of asset transfer to lessee for lease
rental except transfer of ownership of asset.
Lessee is responsible for repair & maintenance of
Lessor’s investment is assured because of its long
FINANCIAL LEASE CONTD
Lease term is much lower than the economic life of
the asset and thus the total investment of the lessor is
not recovered through lease rental during primary
period of lease.
Lessor have to depend on leasing of an asset to
different lessee for recovery of his/her investment.
Lessor provides the technical knowledge of leased
asset to the lessee.
2. OPERATING LEASE
Risk & reward incidental to the ownership of asset
are borne by the lessor.
Besides the cost of machinery the lessor bears
insurance , maintenance and repair cost etc. This is
also known as SERVICE LEASE.
The lessee/lessor has right to terminate lease after
For example- office computer, equipment etc.
OPERATING LEASE CONTD
Under this type of lease the owner of the asset sells
the asset to the lessor and takes it back on lease
under the lease agreement i.e. the lessee is the owner
of the asset. This type of lease helps in transferring
the ownership from true owner to the lessor. This
exchange of the title helps (previous owner) the
lessee in liquidating the funds tied up in a particular
3. SALES AND LEASEBACK
Hence, the seller of the asset becomes the lessee and
the buyer of the asset becomes the lessor. The seller
(lessee) receive the cost of asset and the right to use
the asset , while the buyer enjoys the ownership of
asset and lease rental for the agreed period.
For example: A is the owner of the building; he sold
the building to B and got that same building in lease
from A for the long term.
SALES AND LEASEBACK CONTD
In such a lease agreement , the lessor buys an asset
through borrowed funds. Since huge capital is
involved in purchase of heavy machines and
equipment, therefore, borrowed funds are used to
finance an asset.
Generally three parties involved- a lessee(user), a
lessor (leasing company) and a financer (Banks and
The lessor (leasing company) provides 20%-40% of
the purchase value of the asset through equity
capital and the remaining amount is borrowed from
commercial bank or financial institutions (financer).
Hence it is financed partly by debt and partly by
LEVERAGE LEASE CONTD
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
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.
SINGLE INVESTOR LEASE
In the lease transaction, if both the parties belong to the
domicile of the same country it is called as domestic
DOMESTIC INVESTOR 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
INTERNATIONAL INVESTOR LEASE
DIFFERENCE BETWEEN OPERATING AND
BASIS FINANCIAL LEASE OPERATING LEASE
MEANING A commercial contract
in which the lessor lets
the lessee to use an asset
in exchange of
periodical payments for
usually long period.
A commercial contract
where the lessor allows the
lessee to use an asset in
exchange of periodical
payments for small period of
CONCEPT Long term concept. Short term concept
It is called loan
It is called rental
MAINTENANCE In this lessee would
need to take care and
maintain the asset.
In this, lessor would need to
take care and maintain the
BASIS FINANCIAL LEASE OPERATING LEASE
OBSOLESCENCE It lies on part of lessee. It lies on part of lessor.
CANCELLATION It is generally non-
It can be terminate by the
consent of both parties.
The expenses for the asset
such as depreciation ,
financing are allowed for
tax deduction to lessee
Even the lease rent is
allowed to be deducted from
Rate of interest is fixed:
The rate of interest throughout the lease period
remains the same as decided during the time of
signing the agreement with the mutual consent of
the lessor and the lessee. Thus, the lessee need not
worry about the rise in the rate of interest.
Low initial investment:
For the new set-ups leasing is an excellent option
with low initial cost and expenditure on the
purchase of assets.
Both lessor and lessee get benefited by the leasing
facility. The lessor can claim depreciation in books; on
the other hand, lease rentals can be claimed as an
expense by the lessee.
Effective use of the company’s capital:
Company can use their capital fund for increasing
their other investments rather than investing in asset
purchasing. Leasing becomes a better option than
purchasing fixed assets; the company need not spend
bulk amount together.
Buying assets for the business will create an unnecessary
burden and increase the company’s cost. Thus, leasing
becomes the most convenient way of acquiring required
fixed assets for the business without investing money in
The lessee can get immediate possession of the asset after
signing the lease contract and do not have to wait for the
bank’s or financial institution’s approval for the loan to
buy an asset.
No asset obsolescence burden:
The lessee does not have to take a burden of the charge of
asset obsolesces because of any technological
advancements or changes as it is the liability of the lessor
to change the obsolete assets, the lessee’s only liability
here is to pay a rent for using such asset.
Lessee doesn’t have the holding rights or ownership over
the asset after the expiry of the lease agreement, i.e., the
lessor has a right to lease its asset to another company or
sell an asset after the lease period.
Maintenance of the assets:
In case of the financial lease, the lessee enjoys the right of
ownership on the asset till the date of the expiry of the
lease agreement. Along with that, the lessee has to bear
the burden of maintaining and repairing such assets till it
is in their possession.
The company has to make regular lease payments to the
lessor for using their asset irrespective of the profits or
losses earned, such expense is treated as a lease expense
in the books of the lessee.
Penalty on lease termination:
If in case lessee failed to complete lease term or violates
any clause mentioned in the contract due to any reason
he has to face heavy penalties for breach of contract.
Leasing an asset does not put a one-time burden on the
lessee. It may cost higher in the long-run as the lessor
may charge a high amount as rent for recovering the
asset’s cost plus his profit.
Restrictions on use of equipment:
Lessor may impose some conditions regarding the use of
assets at the time of lease and lessee is liable to follow
those restrictions while using such assets.
No benefits of value appreciation:
No matter the value of the asset increases during the
period of the lease, the lessor won’t get any benefit from
the price rise of the asset, the lessee will only pay the
rental amount as mentioned in the lease agreement.
Sales tax may be imposed twice once at a time of
purchase of assets and twice at a time of leasing of an
Lease financing is the best option for those who cannot
raise the fund with debt financing. Companies having
excess assets can lease their assets to the companies
those who require such assets. Thus leasing becomes
constructive for both the parties the lessor and the