Leasing as Source of Finance

Leasing company finance for: M odernization of Business B alancing equipment ars, scooters and other vehicles and C durables Items entitled to 100% of 50% depreciation o Assets which are not being financed by FIs

Types of Lease
Financial Lease O perating Lease everage Lease L ale and Lease back S ross Border Lease C

Advantages of Lease
Permit alternative use of funds aster and cheaper credit F lexibility F acilitate additional borrowing F rotection against obsolescence P undred percent financing H oon to small firm B

Financial Lease
Irrevocable and non-cancellable contractual agreement. L essee uses the asset exclusively for a relatively longer period, maintains it, insures and avails of the after sales service and warranty backing it. L essee bears the risk of obsolescence as it stands committed to pay for entire lease period.

Contd
Financial lease with the purchase option, where at the end of pre-determined period, the lessee has the option to buy the equipment / asset at a pre-determined value. he leasing company / lessor charges nominal T service charges to lessee towards legal and Other cost.

Operating Lease
Contractual period between lessor and lessee is less than full economic life of equipment i.e. short-term in nature. T he lease is terminable by giving stipulated notice as per the agreement. T he risk of obsolescence is enforced on the lessor who will also bear the cost of maintenance and other relevant expenses.

Leverage Lease
Arrangement for assets of huge capital outlay. P arties involved are (a) Lessor (Max. 20 50% stake) (b) Lessee (As in operational lease) (c) Lenders (Rest stake holders) L essor acquires the asset with maximum contribution upto 50% and rest is financed by lenders secured by mortgage of the asset besides assignment of leased rental payments.

Sale and Lease Back

Arrangement where a firm which has an asset sells it to leasing company / lessor and gets it back on lease. L essee gets the sale price in the market value and gets the right to use the asset during the lease period.Title of the asset remains with the lessor. L ease back agreements are on net basis i.e. lessee pays the maintenance, property tax and insurance premium.

Cross Border Lease

It is international leasing and is referred otherwise as transactional leasing. elates to lease transaction between different R a lessor and lessee domiciled in different countries. Illustration:- Leasing company in USA makes available Air Bus on lease to Air India

Disadvantages of Leasing
Lease rentals are payable soon after entering into lease agreement while in new projects cash generation may start after gestation period. T he cost of financing is higher than debt financing. If the lessee defaults in payment, lessor would suffer a loss.

Legal Aspects of Leasing

U nder Section 148 of Indian Contract Act leasing is executed. T he lessor has the duty to deliver the asset to lessee, legally authorizes lessee to use the asset. T he lessee has the obligation to pay the lease rentals as per lease agreement, to protect lessor s title, to take reasonable care of the asset, and to return the leased asset on the expiry of lease period.

IncomeTax Provisions Relating to Leasing

The lessee can claim lease rentals as tax deductible expenses. T he lease rentals received by lessor are taxable under the head of Profits and Gains of Business or Profession T he lessor can claim investment allowance and depreciation on the investment made in leased assets.