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Leasing

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Leasing

Leasing is one of the most common forms when a company or private individuals need financing their assets, such as machinery, equipment, construction equipment, automobiles, etc. A lease agreement is a contract between a lessee (borrower) and the lessor (owner) for the use of them.  According to the contract, the lessee will monthly pay the lessor for the use of this exact asset.

Comparing with bank credits, it is very meaningful that the leasing asset can be purchased or collateralized by simpler procedures. The basic Principle of Leasing is that the leasing company will purchase the asset and deliver it to the company in return for monthly lease payments.

There are several types of Leasing worldwide:

  1. The Finance Lease or Capital Lease – the lessee gets the ownership of the asset before the lease expires. Simply, the finance lease is the type of lease where lessor transfers all the risks and rewards associated with the asset to the lessee before the lease agreement expires.

 By such type of leasing, the company will finance the purchase of machinery or any movable asset. At the end of the lease term, the mentioned assets will be transferred to the company’s possession as the lessee. So, financial leasing is the best way to purchase additional equipment and machinery.

Leasing
  1. The Operating Lease- it is the type of lease where the lessor does not transfer all the risks and rewards related to the asset to the lessee when the lease expires.

There are several differences with the finance lease:

  • The term of the operating lease is very small compared to the finance lease.
  • The lease term is considerably less than the economic life of the equipment.
  • The lessee can terminate the lease even at the short notice and without any significant penalty.
  • The owner of the asset is responsible for all maintenance costs and other operating costs associated with the leased asset.

Operational leasing is the best solution for companies that have a large auto fleet and have problems updating it every 3-5 years, or for those who want to constantly use a new car and update it every 2-3 years. Operational leasing allows the company to use the car with minimal co-operation and simply return it at the end of the term to replace it with a new one.

  1. Sale and leaseback  – A sale and leaseback arrangement is a type of lease in which one party purchases property, equipment or land from another party and immediately leases it to the selling party under specific terms. The seller could be an individual investor, a limited partnership, an industrial firm, a leasing company, a commercial bank or an insurance company.
  2. Synthetic Lease – A synthetic lease is a type of operating lease that is recorded in such a way that it does not show as a liability on a company balance sheet. It is instead recorded on the income statement as an expense. This allows the borrower to use the asset without being burdened by the tax. 

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