Lease financing in addition to other

sources of financing is one more long term source of finance. There are lease financing companies which supply costly machinery, equipment etc. on lease basis to the industrial enterprises. Such industrial or manufacturing company take the possession of machinery, uses the same in the manufacturing activity and pay rent for the same.

LEASE FINANCING
Here fixed assets are available on rental basis. As a result long term investment in machinery is

not necessary. Lease finance is economic and attractive to small manufacturers and companies. Leasing is getting popular support from small manufactures and small scale sector. Lease financing is comparatively new development in the field of industrial finance in India.

Concept of Leasing
Leasing is growing and expanding activity in

India. Lease companies operate as non-banking financial institutions. Under lease finance arrangement, a manufacturer/small proprietor does not purchase directly a costly machinery/equipment required for his manufacturing activity.

Concept of Leasing
The ownership of equipment remains with the company

called as the lessor. While the firm acquiring the asset on rental basis is called as the lessee. He takes temporary possession of the machine/equipment on rental basis from the leasing company for industrial activities. Lease financing is aptly called as equipment finance.

Concept of Leasing
Here, leasing company provides finance not in cash but

in the form of equipment for the conduct of production activities. Leasing is an arrangement under which a company acquires the right to make use of the assets without holding title to it. It involves the use of an asset on rental basis without the desire to assume ownership. Lease financing is useful for meeting long term financial needs of manufacturing companies in an economical manner.

Leasing is different from Hire Purchase

Lease financing is different from hire-purchase system.

The lessee does not become the owner of the asset as he takes

the assets only for use on lease basis. In hire purchase, the purchaser becomes the owner of the asset on payment of installments as per the agreement. Leasing transactions involves many steps to be taken by both parties to leasing agreement. Leasing process is lengthy.

Leasing is different from Hire Purchase

It starts with the decision of lessee to purchase certain assets on lease

basis and ends when regular lease agreement is signed by both parties. The lessee has to pay periodical rental thereafter.

DEFINITION OF LEASE FINANCING

According to Dictionary of Business and Management: Lease

is a form of contract transferring the use or occupancy of land, space, structure or equipment, in consideration of a payment usually in the form of a rent.

DEFINITION OF LEASE FINANCING

The Equipment Leasing Association has defined lease as, a

contract between a lessor and a lessee for the hire of a specific asset selected from a manufacturer or vendor of such assets by the lessee.

There are two parties in a contract of lease

They are lessor and lessee.
The lessor is normally a company.

The lessee may be a small manufacturer, professional or a

doctor or a specialist.

Leasing is an arrangement between the lessor and the lessee or user

Under this arrangement lessor arranges

to buy capital equipment (machinery, business assets like computer, electronic equipment or vehicle) for the use of lessee fro an agreed period in return for the payment of regular rent by the lessee.

Lessor remains the owner

The lessor remains the owner of the equipment and the lessee remains

the user against regular payment of rent .

Lessee company uses the equipment

The lessee company uses the equipment fully (like the owner)

but without the payment of capital cost. The rent is paid conveniently out of the profits earned.

Promotes Industrialisation
Leasing is one useful source of

finance which facilitates/ promotes industrial activities in a country.

MODERNISATION OF BUSINESS
Leasing, as a source of finance, is normally offered by leasing

companies for modernisation of business, purchase of costly machines, purchase of cars and assets which are not financed by banks and financial institutions.

ADVANTAGES OF LEASE FINANCING

BLOCKING OF INVESTMENT IN FIXED ASSETS IS

AVOIDED:

Huge investment in fixed assets in initial

period is not necessary because of lease facility. The companys funds do not get blocked in fixed assets. Even the rent is treated as tax deductible expenses.

Availability of funds for alternative use arrangement reduces capital expenditure of the A leasing
company on machinery and equipment. Rental payments are possible out of the profits earned from time to time. Funds are saved as capital expenditure is reduced considerably. Such funds saved can be put to alternative uses economically. Thus funds are saved and are made available to alternative uses due to leasing arrangement.

Easy availability of fixed assets

Fixed assets are available on easy terms due to lease financing.

No botheration of maintenance
Lessee company has no botheration as

regards maintenance of assets supplied on lease basis. The responsibility of repairs and maintenance is usually taken up by the lessee. This reduces the botheration of the lessee company.

Obsolescence of Machinery is avoided

The possible loss due to obsolescence of

machines/technology is avoided. The lessee can make such arrangement while making agreement with the lessor. Thus leasing gives protection against obsolescence.

Promotes industrial development

Leasing facility contributes in bringing industrial

development.

Profitable activity to sponsoring company

Leasing is a profitable business

activity. The present leasing boom indicates profitability of this financial activity. Even the risk involved is limited if customers are selected properly and the lease agreement is legally sound.

Formalities involved are limited

The formalities in lease financing are

less as compared to bank loans. Moreover, there is flexibility in the whole process which gives convenience to both the parties. Even restrictions such as debt-equity ratio are not imposed on lessee company under leasing.

Suitable to small manufacturers

Lease financing is convenient to small

manufacturers as they can start production activities with less fixed capital. Even a young technician can start production activities with the help of lease financing facility. Leasing is a boon to small firms and manufacturers.

Economical
Lease financing is economical to

lessees. Lease agreement is for a longer period and the lessee has option to purchase the leased asset after the expiry of the agreement provided lessor is willing for such sale.

Simple Formalities
Simple formalities are involved in lease financing and

can be completed quickly.

Operational flexibility
Lease financing is flexible.
Lease agreement can be adjusted at the

time of renewal.

Facilitates technology up gradation

In lease financing, the lessee may like to have updated machinery

and technology at the expiry of lease agreement. This improves quality of his production with limited additional investment.

Facilitates additional borrowings

Leasing formalities are limited as compared to bank and other

borrowings. Due to leasing arrangement, a company can borrow more funds from other sources.

Flexibility
Lease arrangement is flexible.

It is adjusted as per the need and

convenience of both parties. Lease rent is adjusted as per the cash flows of lessee. There is high degree of flexibility in lease arrangement.

Disadvantages of Lease Financing

No Ownership to lessee: The lessee does not get the ownership of the assets even when he pays rent over a long period. The lessee does not enjoy the salvage value of the assets. The lessee suffers in case of default: In case of default in payment of rent, the lessor can take back his assets i.e. machine. This will bring the lessee in difficulties

Risk business for the lessor

Lease financing is risky as the lessor

has to spend huge money while purchasing the asset. He may come in difficult if the asset is not used properly or if the rent is not paid regularly by the lessee.

Not suitable for high value asset

Assets of very high cost are not provided under lease

financing. Only computers, electronic equipment etc. are provided under lease financing

Costly to lessee
Lease finance is costly to lessee particularly when he

wants to change the line of business and terminate lease agreement. Even tax benefit and incentives may not be available to lessee.

Not Suitable to project finance

Projects are executed over a long period.
Under leasing, rentals are repayable soon

after the lease agreement. Such periodical repayments are not possible under projects which need long gestation period.

Lease financing in India

In India, lease financing is a recent development in the

finance of industrial finance. The First Leasing Company of India Ltd. was set up in Madras. In India, we have exclusive leasing companies and in addition other financial institution which participate in leasing business as a part of their total activities. ICICI and IDBI have their independent leasing divisions.

Lease Finance
The same is in the case of LIC, HDFC, SIDC and GIC
The commercial banks are now permitted to start

subsidiaries for carrying on leasing activity. SBI, Canara Bank and IFCI have recently entered in field of lease finance. In private sector thee are many leasing companies such as Times Guaranty Financial Ltd. and 2oth Century Leasing.

Lease Financing in India

It is estimated that there are more than 500 leasing

finance companies operating in India. Since 1983, there is leasing boom in India. In fact, there is wide scope for lease financing in India. The future of leasing industry is India is quite bright. Financial institutions made entry in the leasing industry in India by 1980s.

Lease Financing in India

Financial institutions made entry in the leasing

industry in India by 1980s. ICICI was the first All India Financial Institution to offer leasing finance in 1983. SBI was the first commercial bank to set a leasing subsidiary (SBI Capital Market) in October, 1986.

Financial Lease
Financial lease is also called as capital lease or long

term lease. The lessee selects the equipments, settles the terms of sale and arranges with a leasing company to buy the same. He also enters into a irrevocable and non-cancellable contractual agreement with the leasing company. The lessee uses the equipments exclusively, maintains it, insures and avails of the after sale services and warranty backing it.

Financial Lease
Financial lease could also be with purchase option,

where the lessee has the option to buy the equipment (at the end of the pre-determined period) at a predetermine value or at a nominal value o at fair market price. The financial lease may also contain a non-cancellable clause which means that the lessor transfers the title to the lessee at the end of the lease period.

Financial lease
Under a financial lease, the leasing company charges

nominal service charges to cover legal and other costs. It may insist on banks guarantee in individual cases. Financial lease are used as financing cum tax planning tool. Like other countries (UK, Japan, USA) financial lease is popular in India. High cost equipments such as office equipment, generator, machine tools, locomotives etc .

Operating Lease
In the operating lease also called as service lease or

short term lease, the contractual period of the lease is between the lessor and lessee. It is less than the full expected economic life of equipment. Here, the lease is for a limited period of a month/six month/one year. The lease is terminable by giving a stipulated notice as per the agreement.

Operating Lease
Normally the lease rental will be higher as compared to

other leases on account of short period. The risk of obsolescence is enforced on the lessor who will also bear the cost of maintenance and other relevant expenditure. The lessor also provides the services relevant such as handling warrant claims, paying taxes, scheduling and performing maintenance and so on.

Operating Lease
This type of lease is suitable for items like computer,

copy machine, office equipments, vehicles etc. which are sensitive to obsolescence and where the lessee is interested in tiding over temporary problems. It may be noted that financial lease is like an installment loan whereas an operating lease is a rental agreement.

Distinguish between Financial lease and Operating lease

BASIS
MEANING

FINANCIAL LEASE A financial lease is like an installment loan. It is a legal commitment to pay for the entire cost of equipment plus interest over a specified period of time. The lessee commits to a series of payment which in total exceed the cost of the equipments.

OPERATING LEASE An operating lease is a rental agreement. The lessee is not committed to paying more than the original cost of equipment during contractual period.

MAINTENANCE OR TAXES

It excludes provision for maintenance or taxes which are paid separately by the lessee.

Operating lease provides for maintenance expenses and taxes of the lessor

BASIS
PERIOD

FINANCIAL LEASE Contract period ranges from medium to long term.

OPERATING LEASE Contract period ranges from intermediate to short-term.

RISK OF OBSCELENCE

The risk of obsolescence is borne by the lessee.

Leasing company assumes the risk of obsolescence.

PERIOD

Contract period ranges from medium to long term.

Contract period ranges from intermediate to short-term.

DIFFERENCE BETWEEN financial lease AND OPERATING SALE

BASIS Financial lease OPERATING LEASE

TYPE OF GOODS

Air craft, land and building, heavy machinery

Computer, office equipment, automobile, truck etc are leased

Financial Commitment

The lease involves a financial commitment similar to a loan by a leasing company. It places the lessee in a position of borrow.

The financial commitment is restricted to regular rental payment. The rental find a place in the P&L A/c of the lessee.

Nature of function

The lessor fulfills financial function.

The lessor fulfills service function.

LEVERAGE LEASE
A leverage lease is used for financing those assets

which require huge capital outlay. The outlay for purchase cost of the asset generally varies from Rs. 50 lakhs to Rs. 2 crore and has economic life of years or more. The leverage lease agreement involves three parties, the lessee, the lessor and the lender. The lessor acquires the assets as per the terms of the lease agreement but finances only a part of the total investment, say 20% t0 50%.

Leverage Lease
The balance is provided by a person or a group of

person in the form of loan to the lessor. The loan is generally secured by mortgage of the asset besides assignment of leased rental payment. The position of the lessee under a leveraged leasing agreement is the same as in case of any other type of lease. In leveraged lease, a wide range of equipments such as rail road, rolling stock, coal mining, electricity generating plants, pipe lines, ships etc are acquired.

Leverage Lease
Under a leverage lease, these are some attractive

investment features in the form of after-tax consequences for the owner of the equipment. By investment 20 or 25% of the cost of an asset, the lessor is entitled to 100% allowance for depreciation plus the investment allowanced. In addition, interest expenses related to his borrowings are also tax deductible. From the point of lessee, lease rentals are deductible in full as a operating expense.

Sale and Lease Back

Under this type of lease, a firm which has an asset sells

it to the leasing company and gets it back on lease. The asset is generally sold at its market value. The firm receives the sales price in cash and gets the right to use the asset during the lease period. The firm makes periodical rental payment to the lessor. The title to the asset vests with the lessor. Most of the lease back agreements are on a net-net basis. Lessee pays all the maintenance expenses, property taxes and insurance.

Sale and lease back

In some cases, the lease agreement allows the lessee to

repurchase the property at the termination of lease. The sale and lease back agreement is beneficial to both the lessor and lessee. The lessee get immediate cash which becomes available for working capital or for further expansion and lessor gets tax benefits. Retail stores, office buildings, multipurpose industrial building and shopping centers are financed under this method.

Cross Border Buying

Cross border lease is international leasing and is known as

transnational leasing. It relates to a lease transaction between lessor and lessee domiciled in different countries and includes exports leasing. In other words the lessor may be of one country and the lessee may be of another country. For e.g. if a leasing company in U.S.A makes available an Air bus on lease to Air India, there would be a cross border lease. First Leasing Company has initiated discussions with Bulgar Leasing of Bulgaria to export bull dozers and shovels in significant number of an export lease to that country