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Chapter: Business Science : Financial Management : Long Term Sources of Finance

Lease Financing

Lease Financing: 1 Definition 2 Elements of Leasing 3 Types of Leasing 4 Leasing Finance Institutions in India

Lease Financing:

1 Definition

2 Elements of Leasing

3 Types of Leasing

4 Leasing Finance Institutions in India


Lease Financing

Lease financing is one of the popular and common methods of assets based finance,


which is the alter native to the loan finance. Lease is a contract. A contract Under which one party, the leaser (owner) of an asset agrees to grant the use of that Asset to another leaser, in exchange for periodic rental payments.

Lease is contractual agreement between the owner of the assets and user of the assets for a specific period by a periodical rent.



Lease may be defined as a contractual arrangement in which a party owning an asset provides the asset for use to another, the right to use the assets to the user over a certain period of time, for consideration in form of periodic payment, with or without a further payment.

According to the equipment leasing association of UK definition, leasing is a contract between the lesser and the leaser for hire of a specific asset selected from a manufacturers or vender of such assets by the lessee. The leaser retains the ownership of the asset. The leassee pass possession and uses the asset on payment for the specified period.


2 Elements of Leasing

 Parties : These are essentially two parties to a contract of lease financing, name ly the owner and user of the assets.

 Leaser: Leaser is the owner of the assets that are being leased. Leasers may be

 individua l partnership, joint stock companies, corporation or financial institutions.

 Lease: Lease is the receiver of the service of the assets under a lease contract.

 Lease assets may be firms or companies

 Lease broker: Lease broker is an agent in between the leaser (owner) and lessee.

 He acts as an inter mediary in arranging the lease deals. Merchant banking divisions of foreign banks, subsidiaries indian banking and private foreign banks are acting as lease brokers.

 Lease assets : The lease assets may be plant, machinery, equipments, land, automobile, factory, building etc.


3 Types of Leasing


1. Financing lease


Financing lease is also called as full payout lease. It is one of the long-term leases and cannot be cancelable before the expiry of the agreement. It means a lease for terms that approach the economic life of the asset, the total payments over the term of the lease are greater than the leasers initial cost of the leased asset. For example: Hiring a factory, or building for a long period. It includes all expenditures related to maintenance.

2. Operating lease

Operating lease is also called as service lease. Operating lease is one of the short-term and cancelable leases. It means a lease for a time shorter than the economic life of the assets, generally the payments over the term of the lease are less than the leaser‘s initial cost of the leased asset. For example : Hiring a car for a particular travel. It includes all expenses such as driver salary, maintenance, fuels, repairs etc.

3. Sale and lease back

Sale and lease back is a lease under which the leasee sells an asset for cash to a prospective leaser and then leases back the same asset, making fixed periodic payments for its use. It may be in the firm of operating leasing or financial leasing. It is one of the convenient methods of leasing which facilitates the financial liquidity of the company.

4. Direct lease

When the lease belongs to the owner of the assets and users of the assets with direct relationship it is called as direct lease. Direct lease may be Dipartite lease (two parties in the lease) or Tripartite lease. (Three parties in the lease)

5. Single investor lease

When the lease belongs to only two parties namely leaser and it is called as single investor lease. It consists of only one investor (owner). Normally all types of leasing such as operating, financially, sale and lease back and direct lease are coming under this categories.

6. Leveraged lease

This type of lease is used to acquire the high level capital cost of assets and equipments. Under this lease, there are three parties involved; the leaser, the lender and the lessee. Under the leverage lease, the leaser acts as equity participant supplying a fraction of the total cost of the assets while the lender supplies the major part.

7. Domestic lease

 In the lease transaction, if both the parties belong to the domicile of the same country it is called as domestic leasing.

8. International lease If the lease transaction and the leasing parties belong to the domicile of different countries, it is called as international leasing. Advantages of Leasing Leasing finance is one of the modern sources of finance, which plays a major role in the part of the asset based financing of the company. It has the following important advantages.


1. Financing of fixed asset

Lease finance helps to mobilize finance for large investment in land and build ing, plant and machinery and other fixed equipments, which are used in the business concern.

2. Assets based finance

Leasing provides finance facilities to procure assets and equipments for the company. Hence, it plays a important and additional source of finance.

3. Convenient

Leasing finance is convenient to the use of fixed assets without purc hasing. This type of finance is suitable where the company uses the assets only for a particular period or particular purpose. The company need not spend or invest huge a mount for the acquiring of the assets or fixed equipments.

4. Low rate of interest

Lease rent is fixed by the lease agreement and it is based on the assets which Are used by the business concern. Lease rent may be less when compared to the Rate of interest payable to the fixed interest leasing finance like debt or loan finance.

5. Simplicity

Lease for malities and arrangement of lease finance facilities are very simple and easy. If the leaser agrees to use the assets or fixed equipments by the lessee, the leasing arrangement is mostly finished.

6. Transaction cost When the company mobilizes finance through debt or equity, they have to pay some a mount as transaction cost. But in case of leasing finance, transaction cost or floating cost is very less when compared to other sources of finance.

7. Reduce risk

Leasing finance reduces the financial risk of the lessee. Hence, he need not buy the assets and if there is any price change in the assets, it will not affect the lessee.

8. Better alternative

Now a days, most of the commercial banks and financial institutions are providing lease finance to the industrial concern. Some of the them have specialised lease finance company. They are established to provide faster and speedy arrange me nt of lease finance.


4 Leasing Finance Institutions in India

Presently, leasing finance becomes popular and effective financial sources for most of the business concerns. With the importance of lease finance, now a days banks and financial institutions provide leasing financial assistance to the industrial concern. The following institutions are famous and widely providing lease finance in India:


Leasing financial institutions in India may be classified into the following groups.


Leasing by Development Institutions


All India development institutions are providing leasing finance assistance to industrial concerns. Some of the public sector leasing finance company in India are follows:

• Industrial Credit & Investment Corporation of India (ICICI)

• Industrial Finance Corporation of India (IFCI)

• Industrial Investment Bank of India (IIBI)

• Small Industries Development Corporation (SIDC)

• State Industrial Investment Corporation (SIIC)


Leasing by Specialized Institutions

Specialized financial institutions also provide lease finance to the industrial concern.

Some of the lease finance providing institutions are as follows:

• Life Insurance Corporation of India (LIC)

• General Insurance Corporation of India (GIC)

• Unit Trust of India (UTI)

• Housing Development Finance Corporation of India (HDFC)


Private Sector Leasing Company

Private sector leasing companies also provide financial assistance to the industrial

concerns. The following are the example of the private sector leasing companies in



• Express Leasing Limited


• 20th Century Leasing Corporation Ltd.


• First Leasing Company of India


• Mazda Leasing Limited


• Grover Leasing Limited


Private Sector Financial Company

Private sector financial companies also involve in the field of leasing finance. The following are the example of the private sector finance companies:

• Chola manda l Investment and Finance Company Ltd.

• Dcl Finance Limited

• Sundaram Finance Limited

• Anagram Finance Limited

• Nagarjuna Finance Limited.

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