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The person who wants to manufacture the product needs an

equipment to do it but not the ownership of an equipment. The
concept of lease financing says Eat the mangoes rather than
counting the trees.

CONCEPT

Lease financing denotes procurement of

assets through lease.

The subject of leasing falls in the category of

finance.
Leasing has grown as a big industry in USA
and UK and spread to other countries in the
present century.
In India, the concept was pioneered in 1973.
It is a commercial arrangement whereby the
equipment owner conveys to the equipment
user the right to use the equipment in return
for a rental.

 Lease is a contract whereby the

owner of an asset (lessor) grants to
another party (lessee) the exclusive
right to use the asset usually for an
agreed period of time in return for
the payment of the rent.

LEASE
FINANCING

A lease financing is a contract

whereby the owner of an asset grant
to another party the exclusive right to
use the asset usually for an agreed
period of time in return for the
payment of rent.

The rentals are pre-determined and

payable at fixed interval of time.
A lease is an agreement allowing
one party to use another property,
plant, or equipment for a stated period
of time in exchange for consideration.

Essential elements/Features of
leasing

Essential elements
1. Parties to the contract: there are essentially two parties in a
contract of lease financing i.e. the owner (lessor) and the user
of the asset (lessee). Lessor as well as lessees may be
individuals, partnerships or joint stock companies etc.
2. Asset: The subject matter of the lease is the asset. The
asset may be anything i.e. an automobile, factory or a
building. The asset must, however, be of lessees choice
suitable for his business needs.
3. terms of contract: the term of the lease is the period for
which the agreement of lease remains in operation. Every
lease should have a definite period, otherwise it will be legally
inoperative. The lease period may sometimes stretch over the
entire economic life of the asset (finance lease) or a period
shorter than the useful life of the asset (operating lease)

4. ownership separate from the user: during the lease tenure,

ownership of the asset vests with the lessor and its use is
allowed to the lessee. On the expiry of the lease tenure, the
asset reverts to the lessor.
5. Lease rentals: the consideration which the lessee pays to
the lessor for the lease transaction is the lease rental.
6. termination of lease contract: at the end of the lease
period, the contract may be terminated by any of the modes:
The lease is renewed.
The asset reverts to the lessor.
The asset reverts to the lessor and the lessor sells it to the
third party.
The lessor sells the asset to the lessee.

Financial lease
The lessor transfers to the lessee substantially all the risks
and rewards incidental to the ownership of the asset.
It involves the payment of rentals over an obligatory noncancellable lease period.
In such leases, the lessor is only the financier and is
usually not interested in the assets.
It is a long term non-cancellable lease.
It ensures the lessor for amortisation of entire cost of
investment plus the expected return on the capital outlay
during the term of the lease.
Types of assets included under such lease are lands,
building, heavy machinery etc.

Operating lease
It is one which is not a financial lease.
It is a short term cancellable lease.
In this, the lessor does not transfer all the risk and
rewards incidental to the ownership of the asset and the
cost of the asset is not fully amortised during the primary
lease period. So under this type of lease, contract lease
period is always less than economic life of the asset.
The lessor provides services attached to the leased asset
such as maintenance, repair and technical advice.
It is also known as service lease. Operating lease is
primarily used for computers, office equipments, trucks
etc.

PARTIES TO THE LEASE

Lesso
r
Lesse
e

Owner of
the Asset
User of the
Asset

Single investor lease

There are only two parties to the
lease transaction, the lessor and the
lessee.

VERAGED LEASE FINANC

Arrangement for assets of huge capital outlay.
It is a 3 sided arrangement.
Lesser borrows a part of purchase cost of the asset from the
third party i.e. lender.
The lender is paid off from the lease rentals directly by the
lessee and surplus cash after meeting the claims of the lendor
goes to the lessor.
Lessor acquires the asset with maximum contribution upto 50%
and rest is financed by lenders.

MANUFACTUR
ER

LESSOR

LENDER

LESSEE

SALE AND LEASE

in this, the lesseeBACK
is already the owner of the

asset. He, under the lease agreement, sells the

asset to the buyer.
The buyer leases back the same asset to the
owner (now the lessee) in consideration of lease
rentals.
under the sale and lease back, the lessee not
only retains the use of the assets but also gets
funds from the sale of the assets to the lessor.

SELLE
R

BUYE
R

LESS
EE

LESS
OR

Domestic lease
A lease transaction is classified as
domestic if all the parties to the
agreement are domiciled in the same
country.

International lease
If the parties to the lease transaction are
domiciled in the different countries, it is
known as international lease.
Internatio
nal lease

Import
lease

Export
lease

 Import lease: the lessor and the lessee are

domiciled in the same country but the
equipment supplier is located in a different
country.

Cross-border lease: when the lessor and the

lessee are domiciled in different countries,
the lease is classified as cross border
lease. The domicile of supplier is
immaterial.

Advatantages
Advantag
es of
leasing
To the
lessor

To the
lessee