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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.
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.
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.
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