Lease– A lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. The possession is bought at first by the lessor (renting company) and afterwards rented to the user (lessee company) which pays a defined rent at periodical periods. Lease financing can be set up much faster as compared to term loans from financial organizations.
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As per Oxford dictionary Lease suggests An agreement by which one party communicates land, residential or commercial property, services, and so on to another for a specified time, normally in return for a routine payment.
Terms to be known:
( 1) Lessor:
A lessor is a person or a company that owns a property and leases the property in consideration of some periodical payments.
Lessor might be private collaboration, joint stock companies, corporation or financial institution.
( 2) Lessee:
Lessee is individual to whom to possession has actually been leased for a periodical payments. Lessee may be an individual, HUF, company etc.
( 3) Lease broker:
He acts as an intermediary in between the 2 parties in setting up the lease offers. Merchant banking departments of foreign banks, subsidiaries indian banking and personal foreign banks are acting as lease brokers.
( 4) Lease properties:
They might be Plant and equipment, structure, land or any property etc.,
( 5) Tenure/ Term:
It’s the period for which the lease deed has been performed. Typically it is mentioned in lease agreement/ deeds.
( 6) Rental payments:
This is the periodical payments made by lessee to the lessor as a consideration for using the home.
Kinds Of Lease:
( A) Lease based on the term
Operating Lease: A lease is categorized as an operating lease if it does not protect for the lessor the healing of capital investment plus a return on the funds invested during the lease term. Typically, these are callable lease and are cancelable with proper notification.
The regard to this type of lease is much shorter than the possession’s financial life. The leasee is required to pay till the lease expiration, which approaches beneficial life of the possession.
An operating lease is especially appealing to companies that constantly upgrade or replace devices and want to utilize devices without ownership, but likewise want to return equipment at lease end and avoid technological obsolescence.
Finance Lease: In contrast to an operating lease, a monetary lease is longer term in nature and non-cancelable. In basic term, a finance lease can be regarded as any leasing arrangement that is to fund making use of equipment for the major parts of its useful life. The lessee can utilize the equipment while the lessor maintains legal title. It is also called capital lease, at it is absolutely nothing but a loan in disguise.
Thus it can be stated, a contract including payments over an obligatory period of defined amounts adequate in total to amortise the capital outlay of the lessor and give some profit.
( B) Lease based upon the method
- Sale and lease back
- Direct lease
( C) Lease based in the parties involved
- Single investor lease
- Leveraged lease
( D) Lease based in the location
- Domestic lease
- International lease
Should Check Out–
- Bridge Finance
- Equity capital financing