Question

Discuss the different types of lease financing and their characteristics that are available to firms.

Answer 1

What is lease financing :

lease financing is one of important source of medium and long term finance where the owner of an asset gives another person, the right to use asset against periodical payments.

The owner of asset is known as lessor and user is lessee.

Different types of lease are :

1. FINANCE LEASE :

Finance leasing is contract involving payment over a longer period. It is a long term lease and lessee will be paying much more than the cost of  the property to lessor in form of lease charges.It is irrevocable and not able to reverse.In this type of lease the lessee has to bear all cost and lessor does not render any service.

finance lease is similar to out and out purchase transaction which has been financed through a term loan, in that payment are made on monthly basis.

* the lessee selects an asset.

* lessor purchases that asset.

* the lessee uses that asset during the lease

* the lessor recovers a large part or almost complete cost of asset in addition to earning interest from rental paid by lessee.

* the lessee has an option of acquiring ownership of an asset.

2. OPERATING LEASE

In operating lease the lessee uses the asset for a specific period. The lessor bears the risk of obsolescence and incidental risk. there is an option to either party to terminate the lease after giving notice.

In this type of leasing

* Lessor bears all expense.

* Lessor will not able to realise the full cost of asset.

* Specialised service are provided by the lessor

this kind of lease is preferred where equipment is likely to suffer obsolescence.

3. LEVERAGED AND NON LEVERAGED LEASE :

In leveraged and non leveraged lease, the value of assets leased my be possible for lessor to finance. so, the lessor involves one more financier who will charge over the leased asset.

leveraged risk is financed and arranged by taking loan. and in this lease if lessee stops making payment, the lessor can take back the asset. and this lease doesn't give title to lessee during lease period.

4. SALE AND LEASEBACK :

In sale and leaseback a company sells asset to seller. the main advantage of it will have that the firm can continue the use of an asset and also can release the fund which they have invested.

5 SPECIALISED SERVICE LEASE :  

in this the lessor of the asset will be providing specialised lease for example lessor is specialised in some electronic gadgets it will provide only electronic items on lease like power station plants . when some lessor re specialised in auto mobile then it will provide automobile services on lease.

6.INTERNATIONAL LEASE :

in this type of lease lessor and lessee are from different countries and leased asset may be also used in different country.This type of leases are used for cost reduction or tax saving benefits.