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LEASING (Leasing Arrangement (Single Investor Lease (Two parties – lessor…
LEASING
Types of Leasing
Financial/Capital Leases
A contract entitling a renter to a temporary use of an asset, and such a lease has economic characteristics of asset ownership for accounting purposes.
Requires a renter to add assets and liabilities associated with the lease if the rental contract meets specific requirements.
Operating Leases
A contract that allows for the use of an asset, but does not convey rights of ownership of the asset .
Represents an off-balance sheet financing of assets, where a leased asset and associated liabilities of future rent payments are not included on the balance sheet of a company.
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Disadvantages of Leasing
Debt
Investors still consider long-term lease as debt and adjust their valuation of a business to include leases.
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Leasing and Financing
Ownership
Financing - the lender holds a lien against your car. At the end of your payment term, you own the car free and clear.
Lease - you must return the car to the dealer when your lease ends, making every lease payment more like a rental payment.
Cost
Lease payments - cheaper than finance payments. Your lease payment essentially covers the depreciation of the car.
Advantages of Leasing
Tax Benefit
Leasing expense or lease payments are considered as operating expenses, and hence, of interest, are tax deductible.
Low Capital Expenditure
An ideal option for a newly set-up business given that it means lower initial cost and lower CapEx requirements.
Balanced Cash Outflow
Cash outflow or payments related to leasing are spread out over several years, hence saving the burden of one-time significant cash payment.
Leasing Arrangement
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Single Investor Lease
Two parties – lessor and lessee. The lessor arranges the money to finance the asset or equipment by way of equity or debt.
The lender is entitled to recover money from the lessor only and not from the lessee in case of default by a lessor.
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Direct Lease
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The lessor and equipment supplier are one and the same person and this case is called ‘bipartite lease’.
Leveraged Leases
Three parties – lessor, lessee and the financier or lender. Equity is arranged by the lessor and debt is financed by the lender or financier.
Direct connection of the lender with the lessee and in a case of default by the lessor; the lender is also entitled to receive money from the lessee.
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