Leasing : Leasing By Deepak Dhingra 2 Leasing, as a financing concept, is an arrangement between two parties, the leasing company or lessor

and the user or lessee, whereby the former arranges to buy capital equipment for the use of the latter for an agreed period of time in return for the payment of rent. The rentals are predetermined and payable at fixed intervals of time, according to the mutual convenience of both the parties. Lessor remains the owner of the equipment over the primary period. Definition : Definition By Deepak Dhingra 3 Lease is a form of contract transferring the use or occupancy of land, space, structure or equipment, in consideration of a payment, usually in the form of a rent. - Dictionary of Business and Management Leasing as a Source of Finance : Leasing as a Source of Finance By Deepak Dhingra 4 Leasing is an important source of finance for the lessee. Leasing companies finance for: Modernization of business. Balancing equipment. Items entitled to 100% or 50% depreciation. Assets which are not financed by banks/institutions. Types of Lease : Types of Lease By Deepak Dhingra 5 Financial Lease: Also known as Capital Lease, Long-term Lease, Net Lease and Close Lease. It is like an installment loan. In a financial lease, the lessee selects the equipments, settles the price and the term of sales and arranges with a leasing company to buy it. He enters into a irrevocable and non-cancellable agreement with the leasing company. Land & building, office equipments, heavy machinery are leased. Continue : Continue By Deepak Dhingra 6 Operating Lease: Also known as Service Lease, Short-term Lease or True Lease. It is like a rental agreement. In this lease, the contractual period between b/w lessor and lessee is less than full expected economic life of equipment. Contract period ranges from intermediate to shortterm. Contracts are usually cancellable either by the lessor or by the lessee. Computers, automobiles, etc. are leased. Continue : Continue By Deepak Dhingra 7 Leverage Lease: A leverage lease is used for financing those assets which require huge capital outlay. The leverage lease agreement involves three parties, the lessee, the lessor and the lender. The loan is generally secured by mortgage of the asset besides assignment of the leased rental payments. In leveraged lease, a wide range of equipments such as rail road, coal mining, pipe lines, ships, etc. are acquired. Continue : Continue By Deepak Dhingra 8 Sale and Lease Back : Under this type of lease, a firm which has an asset sells it to the leasing company and gets it back on lease. The asset is generally sold at its market value. The sale and lease back agreement is beneficial to both lessor and lessee. Retail stores, shopping centers, etc. are financed under this method. Continue : Continue By Deepak Dhingra 9 Cross Border Lease: Also known as International Leasing, and Transnational Leasing. It relates to a lease transaction b/w a lessor and lessee domiciled in different

countries and includes exports leasing. In other words, the lessor may be of one country and the lessee may be of another country. Advantages of Lease : Advantages of Lease By Deepak Dhingra 10 Permit alternative use of funds. Faster & Cheaper Credit. Flexibility. Boon to Small Firm. Protection against Obsolescence. Facilitates Additional Borrowings. Hundred Percent Financing. Advantages: Advantages The burden and cost of potential obsolescence on the lessor . Leasing on a short-term basis is more desirable than an acquisition of an asset in a rapidly changing field. It may be suitable when a firm needs assets for a definite period that is substantially less than the useful life of these assets. Leasing is more flexible than ownership, for it is less permanent and, makes adjustments possible when the lease expires. Slide 26: As leasing is treated differently from other debts and is not subjected to a close scrutiny, a company is able to obtain advantage in its financial position. It is possible for the manufacturers to introduce new and expensive machinery by leasing it to the lessee on a short-term basis. In some cases, firms which are either small or have very uncertain records of earnings are able to obtain the use of assets through leasing. A company with limited financial resources gets the assets on lease for its expansion programme . Slide 27: Leasing may prove to be a convenient way for a corporation to expand gradually, especially when its earnings are inadequate for the purpose. By leasing fixed assets, a company can use the funds which would otherwise be tied up in fixed capital. Leasing should offer cost savings over direct borrowing. Lease financing should be available when an equivalent amount of debt financing is not available. Slide 28: Leasing offers certain tax benefits. It also offers a balance sheet advantage and enhances a companys financial ratios. Leasing makes it possible for a firm to avoid a large immediate outlay for downpayment. Flexibility: It gives a firm more flexibility than ownership. Lack of Restrictions Obligation in bankruptcy: It is less than debt financing. Limitations: Restrictions on use of Equipment no additions/alterations. Limitations of Financial use payout obligations, benefits of warranties. Residual value benefit Consequences of default of terms by Lessee. Understatement of Lessees Asset in B/S. Double Sales-Tax, both by Lessor (purchase) and Lessee (at the time of Lease).

Disadvantages of Leasing : Disadvantages of Leasing By Deepak Dhingra 11 Lease is not suitable mode of project finance. The cost of financing is generally higher than that of debt financing. Certain tax benefits/incentives such as subsidy may not be available on leased equipment. A manufacturer who wants to discontinue a

particular line of business will not in a position to terminate the contract except by paying heavy penalties. If the lessee is not able to pay rentals regularly, the lessor would suffer a loss particularly when the asset is a sophisticated one & less liquid.

Other types of Lease International Lease Import Lease Cross-border Lease Major Players in Leasing industry in India: Independent Leasing companies- enjoy financial & technological collaboration. NBFCs. Manufacturer-Lessors. Banks and Financial Institutions. In-house Lessors.