Lease Financing is most popular and common methods of assets based finance, which we can say it is alternative to the loan finance. Lease is a contract between various parties. A contract made under which one party, the leaser (owner) of an assets agrees to permit the use of that asset to another leaser (utilise that assets by rent basis) in exchange for periodic rental payments.
Lease may be defined as a contractual agreement in which party owning an asset by leaser(owner) give lease for use to another, They get right to use the assets for certain period of time. It is for consideration in form of periodic payment with or without a further payment. It is a period for which the agreement of lease remains for operations.
This term is fixed on agreement or up to the expiry of the assets. The consideration that lease pays to the leaser for lease transaction known a rental of asset. Leasing as a financing concept is a contractual agreement between two parties for a specified period. It may be classified into different types according to the nature of the agreement.
The following are the major types of leasing as follows:
#1. Finance Lease
It is also known as full payout lease. It is one of famous lease which every use. It is a long-term leases and cannot be cancelable before the expiry of the agreement. It done for terms that approach the economic life of the asset and the total payments done over the term of the lease agreement are greater that the leases initial cost of the asset that used.
#2. Operating lease
It is also called service lease. Operating lease is one of the short-term and cancelable leases. It means a lease for a time shorter than the economic life of the assets, generally the payments over the term of the lease are less than the leaser’s initial cost of the leased asset.
For example: Hiring a car for a particular travel. It includes all expenses such as driver salary, maintenance, fuels, repairs etc.
#3. Sale and lease back
Sale and lease back is a lease under which the lease sells an asset for cash to a prospective leaser and then leases back the same asset, making fixed periodic payments for its use. It may be in the firm of operating leasing or financial leasing. It is one of the convenient methods of leasing which facilitates the financial liquidity of the company.
#4. Single investor lease
When the lease belongs to only one parties namely leaser is known as single investor lease. It consist with only one owner/ investor. Normally all types of leasing such as operating, financially, sale and lease back and direct lease are coming under this categories.
#5. Leveraged Lease
This type of lease is used to acquire the high level capital cost of assets and equipments. Under this lease, there are three parties involved, the lender and the lease. Under the leverage lease, the leaser acts as equity participants supplying a fraction of the total cost of the assets while the lender supplies the major part.
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