Lease Financing.

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Presentation transcript:

Lease Financing

Meaning Leasing is an arrangement that provides a firm with the use of and control over the assets without buying and owing the same. It is a form of renting assets. Lease is a contract between the owner of the asset(lessor) and the user of the asset called the lesse, wherby the lessor gives the right to use the asset to the lessee over an agreed period of time for a consideration called the lease rental.

Types of Leasing Operating or Service Lease Financial Lease

Operating Lease It is a short term lease on a period to period basis. The lease is usually cancellable at short notice by the lessee. The lessee usually has the option of renewing the lease after the expiry of lease period. The lessor is generally responsible for maintenance, insurance and taxes of the asset.

Financial Lease A lease is classified as finacial lease if it ensures the lessor for amortisation of the entire cost of investment plus the expected return on the capital outlay during the term of the lease. A financial lease is for longer period of time. A financial lease usually provides the lease an option of renewing the lease for further period at a nominal rent. It is usually non cancellable by the lesse prior to its expiration date.

Advantages of leasing to the Lessee Avoidance of Initial Cash Outlay Minimum Delay Easy Source of Finance Shifting the Risk of Obsolesence Enhanced Liquidity Conserving Borrowing Capacity Tax Planning and Differential Tax Advantage Higher Return on Capital Employed Convenience and Flexilbility Certainity No Floatation Cost No Disposal Problem Lesser Administrative Costs

Limitations of Leasing for the Lessee Loss of Moatorium Period Risk of Being Deprived of the Use of Asset No Alteration of Change in Asset Loss of Ownership Incentives Penalties on Termination of Lease Loss of Salvage Value of the Asset

Advantages of Leasing to the Lessor Higher Profits Tax Benefits Quick Returns Increased Sales

Limitations for the Lessor Higher Profits Risk of obselence Competitive Market Price Level Changes Management of Cash Flows Increased Cost due to Loss of User Benefits Long Term Investment