What is lease financing in special financing?

Finance ManagementAccountingAcademic Content

In leasing, the company which leases is called lessor and the user is called lessee. The agreement made between lessor and lessee is called leasing. Different types of leasing are operating lease, financial lease, sale and lease back and leverage lease.

Financial lease is an agreement in which lessor receives lease payments. In this lessor is responsible for maintenance, taxes and insurance. In this there will be substantial transfer of risk and rewards to lessee.

Main features of financial lease are as follows −

  • Lessee selects an asset.
  • Lessor purchases that asset.
  • Lessee uses that asset during the time.
  • Lessee pays rentals for using the asset.
  • Lessee have an option of acquiring ownership of the asset.

Importance of lease finance is as follows −

  • It is easy to get than a loan.
  • Company will get tax benefits.
  • Flexible way of finance.

A lease is said to be a financial lease if it meets following conditions −

  • Asset transfer to the lessee at the end of contract time.
  • Lessee can purchase the asset at below par value from lessor.
  • Lease plays an important part in asset economic life.

Advantages of lease finance are as follows −

  • Initial investment is less.
  • Lower monthly payments.
  • Tax benefits.
  • Acquisition time is fast.
  • Corporate growth.
  • Fixed rate of financing.

Disadvantages of lease finance are as follows −

  • Imposes restrictions on use of asset.
  • If lease is not renewed, it will effect business.
  • Lesser never become the owner.
  • High pay-out obligations.
raja
Updated on 13-Aug-2020 11:30:02

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