Leasing – Meaning, Terminologies Used, Steps, Advantages

What is Leasing?

Leasing is a kind of financial service which allows a firm to use and control the asset without acquiring it. Leasing helps small firms to acquire assets of higher value. It is the form of renting of assets.


Leasing – Meaning, Terminologies Used, Steps, Advantages

A Lease contract can be defined as

a contract whereby the owner of the asset agrees to another party to use the asset for an agreed period of time in return for payment of rent to the owner.

Lessor is the owner of the asset and lessee is the person who takes the asset on lease. The lessee pays lease rentals periodically to the lessor. The lessor allows the lessee to utilize the asset over the agreed period of time.

The terms and conditions of the lease contract is based on the agreement between the lessor and the lessee. The lease contract contains the period of lease. At the end of lease period, either the agreement may be renewed or the lessee may return the asset to the lesser. Sometimes, the asset may also be transferred by the lessor to the lessee.

Terminologies related to leasing

1. Lessee

Lessee is a person who acquires the asset on lease and also pays lease rentals.

2. Lease Rentals

It is a periodic payment paid by the lessee to the lessor. It is based on depreciation, interest on investment, service charges, maintenance charges, repairs, installation charges, etc.

3. Lease property

The property which is let out for lease by the lessor to the lessee. It also contains details regarding lessor, lessee, about lease rentals nature, etc.

4. Lease term

The duration for which the property is let out for lease.

What does a Leasing contract cover?

The leasing contract covers the following:

1. Name of the lessor, lessee

2. Date of lease agreement

3. Duration

4. Nature of leasing

5. Lease rentals and who has to pay

6. Types of lease equipment

Steps in leasing transactions

1. Lessee identifies the equipment and the supplier or lessor of the asset

2. Lessee enters into agreement with lessor

3. Lessor delivers the asset to the lessee

Advantages of Leasing

Lessee can enjoy the asset without acquiring or owing the asset.

1. The lessee need not pay down payment in leasing. It helps to avoid outflow of cash. Hence, less amount of working capital can be retained in the business.

2. A leasing contract can be modified according to the needs of any business or the lessee.

3. Leasing does not require any significant down payment. It provides 100 percent financing option.

4. Leasing provides tax benefits. Lease payments can be deducted as an operating expense, rather than depreciating asset over a longer period of time.

5. Small scale industries can benefit through leasing. They can go for modernization and increase production by leasing plant and machinery.

6. Financial institutions will not be willing to grant long term loans of higher value for a newly started business, Hence new entrepreneurs can enjoy the asset without owning them through leasing. They need not borrow loans for buying the asset.

7. A business has to borrow money to buy equipment. But through leasing equipment need not be purchased. Hence it provides better debt equity ratio.

8. Lease payments and rates are fixed, hence it is very easy to forecast and prepare financial budgets accurately. Leasing is not treated as loan and it will not appear in the liability side of the balance sheet. So, the debt equity ratio of the concern is not affected due to leasing. Hence, the company can enjoy a better image in the market.

9. New loans can also be borrowed from the financial institutions because of holding a better image in the market.

10. Lessee can decide the type of leasing, asset or property and the supplier according to the requirement.

11. Lessee can utilize the asset for longer period of time

12. Lessee can either renew the contract or terminate the contract according to the requirement.

13. Tax benefits are available both to the lessee and the lessor.

14. All the leasing charges paid will be treated as revenue expenditure. Leasing helps in reduction of payment of tax.

15. Lessee enjoys the utilization of asset without spending money on capital expenditure.

16. Leasing is the cheapest or fastest mode of getting higher value of assets.

17. It is very beneficial to the small scale industrialist who requires assts immediately for production as it is difficult for the small scale industries to avail loan from financial institution.

18. A lessee can opt for operating leasing when the asset acquired is subject to the technological changes. Lessee can enjoy the asset without acquiring it.

19. Technocrats can enjoy more benefits through leasing as the promoters will not able to contribute sufficient margin money.