Leverage lease is an agreement between lessor and lender. This agreement tell that lessor purchases the asset from the lender by acquiring funds from third part or from taking loan from financial institutions.
In this, the lessor transfers lease rents to financial institution or to the third party. The financial institutions or third party charges loan instalments and balance amount (if any) will be transferred to lessor.
Characteristics of leverage ratio are mentioned below −
Accounting treatment
It is divided into three parts as follows −
Difference between leverage finance and leverage lease is mentioned below −
In leverage lease, three parties are involved which are a lessor, a lessee and the lender. Whereas in leverage finance, only two parties are involved which are a lessor and a lessee.
In leverage lease, payment lies are between the lessee and the lender. Whereas in leverage finance, payments lies are between the lessee and the lessor.
In the lease finance, lender have right on the asset. Whereas in leverage finance, lessor have right on the asset,
Leverage financing is simple to understand. Whereas, lease leverage is a bit complicated to understand.
Difference between leverage lease and operating lease is explained below −
In leverage lease, the risk and obligations are with lessee. Whereas in operating lease, the risk and obligations are with lessor.
In leverage lease, three parties are involved a lessor, a lessee and the lender. Whereas in operating lease, only two parties are involved a lessor and a lessee.
In leverage lease, agreement can be cancelled. Whereas in operating lease, agreement can be cancelled.
In leverage lease, funds are arranged by lessor and the lender (third party or by some financial institutions). In operating lease, total funds are arranged by lessor only.
In leverage lease, payments can be shown as leased assets in balance sheet. Whereas in operating lease, payments can’t be shown in balance sheet.