An Introduction to Leasing
Leasing (sometimes known as lease rental) can be defined as the contract granting use of real estate, equipment or other fixed assets for a specified time in exchange for payment, usually in the form of rent. The owner of the leased property is called the lessor, the user the lessee. When structured as an operating lease, this form of financing avoids the down payment usually required for the purchase of equipment. Because leased equipment is not owned by the company, it does not appear on the balance sheet. A financing lease does appear on the balance sheet.
Terms to know
Lease Broker: Any broker who arranges a lease between a lender and a lessee.
Lease Purchase/Hire Purchase: System of purchase by paying in instalments.
Balloon Lease: Balloon leases or loans are those in which repayments are not made in a regular manner, but are made as funds become available, in balloons.
Capital Lease: One where essentially all the benefits and risks of ownership are transferred to the lessee. It must be reflected on the company's balance sheet as an asset and corresponding liability.
Operating Lease: One where the risks and benefits, as well as ownership, remains with the lesser.
Sale and Leaseback: An agreement in which the owner of a property sells that property to a person or institution and then leases it back again for an agreed period and rental.
- Step Up
- Residual value
Structured leases are leases where the payment pattern of the lease is structured or pre-set according to the cash flow patterns of the lessee. This method is outside the normal lease structure where the lessee has to pay a fixed monthly rental amount throughout the lease period.
For example, a step up lease is one in which the lease rentals are arranged so that the initial lease rental amounts are less than those towards the end of the lease period (i.e. the lease rental amount gradually increases during the lease period).
Balloon/Residual leases require the lessee to pay a lump sum at the end of the lease period rather than at the beginning as a down payment.
Arrears and their consequences
A lessee is expected to pay the due lease rentals on the date agreed at the point of signing the lease agreement. Delays in payment are referred to as arrears, which can result in reminders for payment being sent by PLC, guarantors being called, visits being made to the lessee's premises and, as a final measure, the leased asset being repossessed by PLC.
The lessee in arrears should notify us of the difficulties they are facing, provide reasoning as to why they are unable to pay on the due date and inform us of when they can settle the dues. This enables the Company to take necessary action and help the customer in settling the dues.
A customer in arrears for an existing facility or a customer with a settled facility but with previously unsatisfactory payment patterns would face difficulty in entering into a new facility. However, customers with a good payment history with us would certainly draw many benefits, rewards and attractive service.
Requirements for obtaining a lease
The main requirements for obtaining a lease from PLC are that the customer should be a Sri Lankan citizen above 18 years of age, be able to provide proof of a fixed income, possess a satisfactory financial background and exhibit willingness to pay the lease rental.
We generally request two guarantors or any other type of security acceptable to PLC, though this is not always essential. This requirement is decided upon after analysing the customer and his/her capacity to repay.
The maximum lease period for any asset is five years and the minimum is one year. The lease period (within this limit) is decided by the officers at PLC to suit the customer's requirement.
Leasing versus outright purchasing
A lease can be favourable compared to outright purchasing due to different payment schedules and tax basis handling. In some companies it is beneficial to use capital for other purposes and to lease equipment, paying the hire out of the income generated. Leasing can also be preferable to purchasing when considering equipment that quickly becomes obsolete.
Leasing allows users to attract many financial benefits, including:
- Control over cash flow issues
- Better utilisation of funds
- Maximum tax benefits for companies
An outright purchase will tie up cash and generate a considerable opportunity cost. Leasing solves this problem and allows users to use their cash more profitably.
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