14. 09. 09
posted by: KSCM
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Leasing is the process of lending a capital item – usually plant, machinery or vehicles to a person or company in return for a regular payment over a specified period of time. The lessor retains ownership of the asset and retains the title.

Why Lease?

The leasing company is termed the lessor and the person or company wishing to have the item is called the lessee. The lessee is charged with the responsibility of maintaining the item during the term of the lease. 

Equipment leasing is an excellent way to grow your business without significant out of pocket expenses. Leasing offers real advantages including better value, more convenience and greater control. In most cases, the full amount of the equipment, as well as the service, shipping, installation costs and maintenance can be included in the lease. This spreads the cost out evenly over the term of the lease freeing up your money to work harder for you. Currently, 35% of all equipment is leased. 

 Finance Lease or Capital Lease

  • What it is good for: If you plan on owning the equipment at the end of the lease.
  • How it works: The full purchase price plus interest charges are spread over the length of the lease.
  • Benefits: You will own the equipment at the end of the lease for a minimal amount, such as a fixed percentage of the original cost or $1.00.

Skip Lease

  • What it is good for: Organizations that need a flexible repayment schedule such as seasonal businesses, agricultural companies, recreational services firms, and school systems.
  • How it works: You specify months when no payments are made.
  • Benefits: Flexibility to adjust to irregular cash flow.

Sale Leaseback

  • What it is good for: Customers who decide that leasing is more beneficial after having purchased their equipment. Sale-leaseback also allows companies to raise cash for other investments or cash flow purposes.
  • How it works: The business that has already purchased equipment sells it to a leasing company, which, in turn takes ownership of the equipment and then leases it back to the business. Sale Leaseback requires that the equipment be purchased within 90 days.
  • Benefits: The sale-leaseback allows you to put money back into your business or into investments that appreciate rather than depreciate.

60 or 90-Day Deferred Lease

  • What it is good for: Businesses that need equipment for operation and development that will not immediately generate revenue.
  • How it works: A 60 or 90-day deferred lease can be structured as a finance lease or a true lease. There is usually no advance payment required, and the first payment is not due until 60 or 90 days after the lease begins.
  • Benefits: The equipment you need can be acquired with little to no money up front and no payments for 2-3 months.

Master Lease

  • What it is good for: Leasing additional equipment over a certain period of time.
  • How it works: Separate lease schedules are created to accommodate the addition of equipment over that period of time. The master lease governs the basic terms and conditions. Each schedule may include different end of term options and different lease lengths but all will come under one "e;Master Lease."e;
  • Benefits: Acquiring additional equipment is made more convenient.

Municipal Lease

  • What it is good for: Local and state government organizations looking to acquire equipment.
  • How it works: The tax structures and details of municipal leases vary considerably from standard business leases. Seek the advice of your financial advisor to better understand your municipal lease options.
  • Benefits: Municipal leases are designed specifically for local and state government organizations.

Step Up Lease

  • What it is good for: Businesses whose financed equipment will become more profitable over time.
  • How it works: Payments increase according to a regular schedule over the life of the lease.

Benefits: Payments can be differed to match cash flow.


 -                 For most limited companies leasing is an attractive tax efficient financing option, as the leasing costs are chargeable against profits.

-                  Removal of the need to find a large capital sum to obtain use of the item in the business.

-                  Removal of fear of heavy depreciation or early obsolescence of the item e.g. I.T.

-                  Enables the company to free up large sums of money which are tied up in company fleet properties e.g. vehicles.

-                  Obtaining immediate use of the asset with payment over a long period which enables the company to have good cash flow.

-                  Options to continue to lease at a nominal payment after the expiry of the original lease period.


 -                 Leasing tends to be marginally more expensive than traditional financing options such as loan finance.

-                  The legal ownership of the item does not pass to the lessee at any one time.

-                  Leasing can lead to grave losses in the company through penalties in the event that the lessee is not able to make the repayments as per the agreement.

-                  There can also be repossession in the event that the lessee is not able to meet the repayment as per the agreement.

-                  More expenses in the event additional guarantees are required.

-                  Fixed interest rates which may not be favoring the lessee through out the period of lease.

 Types of Leasing

There are three broad sub divisions of leasing.

Ø  The finance lease (also known as full pay out lease)

Ø  Operating lease.  (also known as market base leasing)

Ø  Contract hire lease (supported lease)

  1. A finance lease is a contract involving payment over a certain period of specified sums of money which in total liquidates the lessors capital outlay and provides him with a profit.

The agreed period will be depend on two principal factors:-

a)     The lessor’s estimate of the useful life of the subject asset.

b)     The lessee’s requirement and the immediate need.

Items subject to finance lease involve heavy equipment and plant.

  1. An operating lease is applicable where the subject asset in not wholly amortized during the opening period of the lease and the lessor is relying on a renewal of the agreement at the end of closing period.

If the agreement is not renewed by the lessee, the lessors has the option of leasing the item to another party or sell the item at, or above an estimated residual value.

Items normally subject to the operating lease will involve cars, computers, photocopies etc.

3. Contract Hire is a form of operating lease (often used with cars, commercial vehicles or service) that includes a number of additional services such as maintenance, management or replacement if asset is in repair. 


The finance lease is broken into two parts-

-Primary period.

This involves calculation of the useful life of the leased item up to 80%. This is an important period as it sets the contract and particularly to take care of the two parties.

-Secondary period.

This involves an indefinite length of period and can take the agreement through to the end of the actual useful life of the leased item. The repayment are lower than in the primary period.

The principal rental binder falls within the primary period during which the lessor will seek to recover his capital outlay and his profits and equally the cost of his money.

In a leasing agreement the following normally apply.

  1. The lessee enjoys the use of the equipment so long as he observes the terms of the agreement.
  2. The lessee is responsible for the maintenance of the equipment in good working order and for its insurance.
  3. Sub-letting is usually prohibited.
  4. The lessee undertakes, not to move the plant from the site without the lessor’s permission.
  5. The lessor will have the right of repossession if there is a significant breach of the agreement.
  6. The lessee is required at the outset to confirm that he has chosen  and accepted the equipment since the lessor cannot give a warranty as to the fitness, but will as far as possible pass on the suppliers warranties to the lessee.
  7. The lessee is generally required to settle rental payments by way of standing orders on the lessor’s bank or through direct debits.


Sales aid leasing

The selling techniques in any organization will be determined by its products.

1)     Some equipment by its very nature must be available for immediate delivery and it is with such items that the sales aid leasing can play a significant role.

2)     With sales aid leasing, close contact between the suppliers and the leasing company is essential if the joint operation is to prosper.

3)     Sales aid leasing is suitable for small items which are readily identifiable such as computers, photocopiers, commercial vehicle etc.

Direct leasing

  1. The lessor and the lessee discuss the proposal together before an order is placed. Many purchasers will have established relationships with the leasing companies which have names in the market.
  2. The appraiser should satisfy himself that the prospective lessee has sufficient working capital to support extra sales generated by the new investment.
  3. Factors to be taken into account by the lessor will include:-

a)               Nature of the industry.

b)               Anticipated residual value of the equipment to be leased. This is because the equipment will need to be serviced and availability of the spare parts is an important factor.

c)               The length of the primary period the lease will be written and the rentals required to equate to the risk involved.

d)               Cash flow in the lessee’s company to co-op up with the monthly rentals.

End of Lease Options

At the end of the lease term, you have various options.

Lease contracts can stipulate that you

  • Return the asset.
  • Have the right to act as an agent to sell the asset to an independent third party.
  • Renew the contract or enter into secondary periods.

It is important for you to anticipate your future needs as each option has its advantages and disadvantages and will affect your monthly payments.

Seek the assistance of a professional advisor if you feel you need help!      

Assessment of a leasing applicant

While there may not be a lot of deviations to any other ordinary assessment on a loan application the following should be considered when assessing a leasing application.

a)  Continuity of the leasing applicant-This is very important as the lessor will depend on monthly rentals.

b)  Industry- where the leasing applicant is operating – some of the industries are more stable than others and it will be important to have this parameter as a subject of score.

c)     Time in trade is an important aspect to consider when assessing a leasing applicants .This is important as it will form the basis of stability.

d)     Cash flow- this will be a very important factor as the lessor will be depending on the monthly rentals as a consideration of the leased item.

e)     Directors- of fundamental consideration will be the directors behind the organization and particularly their backgrounds and professionalism. Good business people will demonstrate seriousness and hence a profitable organization.

 f)       Period of lease- As in any other type of credit, the period is a good factor for consideration when assessing the leasing applicant. The shorter the period the better for the lessor and especially in a finance lease.

g)     Audited accounts.  This will give a picture of the past operation of the leasing applicant and hence a good platform to facilitate decision making.

i) Returns from the transaction - of importance to the lessor is the return from the whole transaction and  hence a factor to be considered when assessing a leasing applicant.


 Key Definitions in Risk Management

 Risk is the possibility of an adverse event occurring and its potential for negative implications to an organization.

 Risk management is the process of managing the probability or the severity of the adverse event to an acceptable range or within limits set by the organization.

 A risk management system is a method of systematically identifying, assessing, and managing the various risks faced by an organization.

 Risk management in leasing

 Identifying the right customer

 A well designed application form will be the first step in risk management. 


 Monitoring the behaviour of the repayment is very important as it will show any success or difficulties in the payment of rentals.


 The insurance of the equipment should be adequate and the lessors’ interest fully covered such that in case of an eventuality the loss is covered.

 Bonds and Guarantees

 The lessor has the right to ask for a bond or a guarantee to hedge for ant costs in case of breach of contract.

 Things to Watch out for when leasing :

  • Return of Asset Conditions. If you choose the asset to be returned  at the end of the lease period the condition in which and the place where it must be returned are important aspects to consider carefully for the purpose of completion of the contract.
  • Notice Period. If the lease includes the option to renew, take note of any time periods in which to give notice in case you do not want to renew the contract. Do not assume that the contract is automatically renewable as this will give you problems when following additional rentals and therefore reduces disputes.
  • Purchase Rights. If you need to negotiate the rights to sell the asset at the end of your lease, a predetermined fixed price offers more value as the 'fair market value', which theoretically is always available to you may attract an unfavorable amount because of depreciation.
  • Maintenance Responsibility. Clarify which service and maintenance programs are included in the lease. If the lessee is responsible for service and maintenance, make sure that you are very clear as to the exact maintenance and services to avoid any disputes.


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