FINANCIAL LEASING COMPANIES: FUNCTIONS, TYPES - DUDAS - 2025

The financial leasing are the owners of land, house or other possession, selling the right to use the property for a period of time.

The contract that governs the rights of the lessor is the lease, which includes the right of the tenant to use the property under certain conditions, without interference from the lessor, for the period of time set in the contract. In return, the tenant pays a rent.

A finance lease has characteristics similar to an installment purchase. This is because the usual result is that the lessee becomes the owner of the asset at the end of the lease.

For the lessee there may be tax benefits to leasing an asset instead of buying it. Plus, recurring payments are easier to finance than the full purchase price of the property. Leasing is comparable to renting the asset for a specific period of time.

For a landlord, the main advantage of a lease is that it retains rights to the property. On the other hand, it generates a return on your invested capital.

Features

A finance lease is a lease in which the lessor is not the manufacturer or seller of the equipment, it only acquires the asset to lease it to a lessee.

The financial lessor acts in the same way as a lender making a loan, in which the equipment is collateral: the lessee selects the equipment and determines that it is appropriate for his use and that the seller is reliable, the lessor only provides the money.

The lessor assumes no risk or rewards based on assets. You only accept financial risks and rewards, and that is why the name of financial leasing.

The legal owner of the asset is the lessor, and gives the lessee the right to use or occupy the asset for a specified period. The lessee provides payments to the lessor for the use of the asset.

The financial lessor assigns the lessee all its rights against the seller. The lessor makes no "implied warranty" and the lessee cannot revoke his acceptance once he has accepted the equipment.

Leasing contract

The financial lessor must be compensated for any loss incurred during the contract due to damage or misuse of the asset in question. If the asset is sold, the lessor must authorize such a transaction and is entitled to receive any financial gain resulting from the sale.

Although the lessor retains ownership of the asset, it has reduced rights to the asset for the duration of the agreement. One of these limitations is that the owner, given her restricted access to the asset, can only gain access with the permission of the lessee.

The lease is not cancellable, which means that the lessee cannot return the asset without having paid the entire investment of the lessor. Therefore, full repayment of the lessor's investment is guaranteed.

At the expiration of the contractual period, and depending on the condition of the asset, the asset will be returned to the lessor. It may also be delivered to the lessee, if the latter decides to buy the asset.

Secured loan

Finance leases are technically different from, but substantially similar to, secured loans.

The rate of return of the financial lessor is fixed: it does not depend on the value or performance of the asset. Lease rentals result in a verifiable rate of return on the investment, called the implicit rate of return.

A finance lease is conceptually not very different from a bank loan. Traditionally, a business borrows from a bank or other lender, signs a note, and uses the money to purchase the equipment, which remains as collateral for the bank.

If the equipment does not work, the company can claim the supplier, but cannot withhold payment of the note. You also cannot sue the lender.

Types

Some landlords may grant a “rent-to-own” lease, whereby all payments made by the lessee will eventually convert from lease payments to a down payment for the eventual purchase of the property.

Financial leasing

Also known as a capital lease, it is a lease in which the lessee acquires full control of the asset and is responsible for all maintenance and other costs associated with the asset.

This type of lease is required to be recorded on the lessee's balance sheet as an asset. All interest and principal payments are recorded separately in the income statement.

The lessee assumes both the risks and the benefits of ownership of the asset. A capital lease is a long-term lease that covers the majority of the asset's useful life.

There is a residual quantity option for the lessee to purchase the property or equipment at a specified price. The ownership of the property can be transferred to the tenant at the end of the lease term.

The most common type of financial lease is for houses or apartments, to live individuals or families.

Operating lease

It is a type of lease in which the lessor retains all the benefits and responsibilities associated with the asset. The lessor is in charge of maintenance and other operating expenses. The lessee does not record the asset on the balance sheet, as it is treated as an expense.

The lessee uses the asset or equipment for a specified period of the asset's life. It does not bear the maintenance cost. All running costs (service, registration, insurance, etc.) are included in the lease within the designated term.

The lessee does not have the option to pay a residual amount to purchase the asset. The lessor retains the property rights during and at the end of the lease term.

Sale and leaseback

It is a type of agreement in which one of the parties acquires an asset or property of another party and immediately leases it to the selling party.

The seller becomes the lessee and the company that buys the asset becomes the lessor. This type of agreement is implemented on the condition that the seller will immediately lease the asset to the buyer, subject to an agreed rate of payment and payment period.

The buyer in this type of transaction can be a lessor, a finance company, an individual or institutional investor.

References

1. CFI (2018). Lessor vs Lessee. Taken from: corporatefinanceinstitute.com.
2. Investopedia (2018). Lessor. Taken from: investopedia.com.
3. Wikipedia, the free encyclopedia (2018). Finance lease. Taken from: en.wikipedia.org.
4. Street Fleet (2013). Operating Vs Finance Leases (What's the Difference). Taken from: streetfleet.com.au.
5. Marks & Associates, PC (2018). Explaining What We Do Finance Leases. Taken from: leaselawyer.com.