Basics of Leasing
Equipment leasing World-over has developed as one of the most potent alternatives to funding an equipment.
This is intended to be a primer to understanding the business of equipment leasing. The basic features of this write-up are:
- It is authentic – written by one of the most respected leasing commentators in the World.
- It is independent – since the author does not have any interest in leasing business other than as trainer-author-consultant, you may expect a completely unbiased treatise.
- It is very simple and to-the-point.
- It tries to make full use of the navigational and graphical possibilities offered by the Web for cross-references, details and illustrations.
- It is excellent value for the time you spend reading, if you have any interest in leasing as lessor, lessee, consultant, academician or accountant.
Leasing: Alternative to funding or alternative to acquisition?:
Is leasing merely an alternative to funding, or is it an alternative way of acquiring the equipment? If it were a pure financial alternative, the user should stay in the position of a virtual borrower. In other words, the user can look at leasing as a mode of financing – just as loan, bond or other borrowing option.
If it were an alternative mode of acquiring an asset, such as an asset-renting option, it becomes a distinctive way of getting to use an asset without owning, or almost-owning it. In this case, the user would be looking at leasing as an alternative mode of acquiring the equipment, significantly different from a plain financing alternative.
If a lease plan is a funding alternative, it is called a financial lease. If it is not a financial alternative alone, it is an operating lease.
Most lessors are financial intermediaries, and therefore, are obviously comfortable with financial leases. Most leasing in the World is still financial leasing. However, operating lease plans are also available for many equipments now. Operating leasing is certainly a faster growing segment of leasing business.
Explanatory Notes:
The use of the word "Equipment leasing" is to distinguish it from real estate leasing. Within the broad meaning of "equipment" is included everything other than real estate, and of course, employee leasing.
Financial intermediaries means institutions or entities which mediate in the flow of money from one sector of the economy to the other. Banks are typical financial intermediaries – they source money from depositing public, and route it to the borrower corporates.