Definition of Leasing

Steps involved in Leasing

A contract of lease provides a person an opportunity to use an asset which belongs to another person. The following steps are involved in a leasing transaction

Ø  The lessee identifies the need for the equipment and selects the supplier.

Ø  The lessee approaches a leasing company or Lessor to lease the equipment needed.

Ø  The lessee has to furnish the following information:

Ø  Name and address of lessee

Ø  Details about his business

Ø  Name and address of guarantor, if any

Ø  Description of the equipment

Ø  Name and address of the supplier and the quoted price

Ø  Place of installation

Ø  Duration of the lease.

Ø  The Lessor examines the proposal after receiving the particulars from lessee and evaluates the credit-worthiness and rent paying capacity of the lessee.

Ø  The Lessor and Lessee enter into lease agreement. It contains the terms and conditions of the lease such as, lease period, rental payments, details regarding renewal of lease period, cost of repair and maintenance, insurance and any other expenses etc.,.

Ø  After the lease agreement is signed, the Lessor requests the manufacturer to supply the asset to lessee.

Types of Leasing

Financial Lease

Financial lease is an alternative to borrowing money and buying the equipment. The features of financial lease are:

Ø  The machinery is selected from the supplier by lessee based on his requirement.

Ø  The lessee negotiates the terms of the purchase i.e., price, delivery, installation, warranties, maintenance and payments.

Ø  The payment for purchases is made by Lessor and he is the legal owner of the machinery.\

Ø  The risk of obsolescence and responsibility for maintenance are to be borne by lessee.

Ø  Lessee has to pay rent regularly.

Operating Lease

Operating lease is a rental agreement and its features are as follows:

Ø  The period of the operating lease is generally shorter than the economic life of the leased asset.

Ø  The ‘lessor’ bears the risk of obsolescence and responsibility of maintenance of asset.

Sale and Lease Back

It is an agreement between owner of the asset and leasing company. First, the firm (owner) sells the asset to the Leasing Company and leases it back simultaneously. The ownership of the asset transfers to the leasing company, the company in turn leases it to the seller and the seller becomes lessee.

Cross Border Lease

The lease agreement is made between the persons of two countries. Lessor and lessee are domiciled in different countries, the lease is said to be cross-border lease.