Typically, a company first decides what asset it needs and then, negotiates a lease contract with a lessor for use of that asset. The lease agreement establishes that the lessee has the right to use the asset and, in return, must make periodic payments to the lessor (the owner of the asset). The lessor is usually either the asset’s manufacturer or an independent leasing company. If the lessor is an independent leasing company, it must buy the asset from a manufacturer. The lessor then delivers the asset to the lessee, and the lease goes into effect, for example, IBM Global Financing leases billions in equipment annually. There are four basic elements in a lease contract which are the parties, the assets, the time period and the payment. Lease financing is very beneficial for business because you can get the required assets in the affordable price since; it is a method of financing under which assets can be used without obtaining their ownership or title. There are five major types of leases you can opt in your business as below:
Operating Lease
An operating lease, sometimes called service or maintenance lease is a lease contract relatively for short period. The term of this type of lease is shorter than the assets economic life. This lease can be cancelled with proper notice.
Financing Lease
A financing lease, also termed as a capital lease, is longer term in nature and is non cancellable. The lessee is obligated to make payment until the expiration of the lease contract. Expiration of lease contract approaches the useful life of the assets. Some financial leases provide for renewal or repurchase option at the end of the lease period.
Sale and leaseback
Under sale and leaseback contract, a company sells a property to another party and this party leases back to the firm immediately. The lessor normally pays a price close to the assets fair market value. The lease payment is set at a level that will return the full purchase price of the assets to the lessor, plus provide a reasonable rate of return. Insurance companies, finance companies, and independent leasing companies etc. are involved in sale and leaseback arrangement.
Leverage Lease
Leveraged lease is a tax-oriented lease in which the lessor borrows a substantial portion of the purchase price of the leased asset on a nonrecourse basis, meaning that if the lessee defaults on the lease payments, the lessor does not have to keep making the loan payments. In leverage lease there are three parties involved they are the lessee, the lessor and the lender.
Direct Lease
Direct lease results when a lessor owns or acquires the assets that are leased to a given lessee. In other words, the lessee did not previously own the assets that it is leasing. The lessor may be a manufacturer of assets, financial institution or professional lessor.
A finance lease will allow you to have immediate access to the equipment you require to run your business, without having to come up with the full purchase price and huge investment. This frees up cash flow for the other things you need.
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