0 - Leasing Business Finance

LEASING
Leasing – A lease is a negotiated contract between the owner (lessor) of the property
allowing the firm (the lessee) the use of that property for a specific period of time for a
specific rental.
Lesse- is the party that uses, rather than the one who owns, the leased property.
Lessor- is the owner of the leased property.
A BRIEF DESCRIPTION OF THREE LEASING COMPANIES
Ford Credit- It is the largest company in the world dedicated to automotive finance, serving
more than 10 million customers in 40 countries. With a diverse workforce of over 18,000
employees worldwide, the company is a wholly-owned subsidiary of Ford Motor Company.
PCI Leasing and Finance, Inc.- This is an 84%-owned subsidiary of Equitable PCI Bank. Its
principal business is to provide leasing and financing products to commercial clients.
Japan PNB Leasing and Finance Corporation- This company is a joint venture between
the PNB and the IBJ Leasing Co., Ltd. Japan of the Mizuho Financial Group.
TYPES OF LEASES
1. the financial lease;
2. the operating lease;
3. the sale and leaseback arrangement; and
4. net and gross leases.
The Financial Lease

• is a non-cancelable document that obligates the lessee to provide periodic rental
payments during the basic lease term.
• Also known as fully pay-out lease.
The Operating Lease

• also sometimes called service lease, is a kind of lease usually cancelable by the
lessee with proper notice and that the lessor usually maintains the asset. It is a short-
term lease used to finance equipment such as computers, railroad cars, or tankers.
Sale and Leaseback

• is a special type of lease. When a firm owns an asset, sells it to another, then uses
the same asset on a lease agreement with the new owner, such arrangement is
called sale and leaseback.
• It is more commonly used for real estate.
Net and Gross Leases
• Leases can either be net or gross. Under the net lease agreement, the lessee bears
the expenses associated with the asset, such as taxes, repairs and maintenance,
and insurance.
BASIC LEASE PROVISIONS

A typical lease agreement contains some or all of the following provisions:
1. The period over which the asset is to be leased;
2. The rental payments and the payment dates;
3. The assignment of responsibility to one of the parties;
4. Security provisions:
5. Escalation clauses; and
6. Options
ADVANTAGES OF LEASING
Leasing provides certain benefits to the lessee. These are the following:
1. the risks inherent to ownership of the property under lease are borne by the lessor;
2. flexibility;
3. piecemeal financing;
4. avoidance of restrictions accompanying debt;
5. evasion of budgetary restrictions;
6. cash is freed for more profitable investment;
7. possible tax advantages over ownership; and
8. lease financing does not appear as debt in the company's balance sheet.
Lessor Bears Ownership Risks

1. the risk of obsolescence;
2. the risk of acquiring a defective title to the property; and
3. the risk of losing the property due to some unforeseen events.
Flexibility
• Being tied up with a property owned is one of the disadvantages brought about by
ownership. The disadvantages mentioned is reduced under a lease agreement. If the
leased asset proves to be unprofitable, the lessee is free to abandon the use of the
asset after the expiry of the lease.
Piecemeal Financing
• The burden brought about by such costs are not associated with lease financing.
Avoidance of Restrictions Accompanying Debt
• Bond issues, at times, restrict the borrower from acts of further borrowing, forcing
borrower to wait until the bond issues are redeemed Under a lease agreement, such
restrictions are seldom incorporated.
Evasion of Budgetary Restrictions

• Capital budgeting systems require companies to meet requirements before spending
on capital assets, with lease agreements not covered by budgetary restrictions
allowing for the use of required assets is possible.
Cash Made Available for More Profitable Investment

• Alternative financing methods, such as lease agreement, the company's cash is
freed and could be used for more profitable activities.
Tax Advantages Over Ownership

• Leasing provides an alternative to the firm. This alternative, in turn, makes it possible
for the firm to reduce its tax burden.
Lease Does Not Appear as Debt

• When capital assets are financed by a lease agreement, no liabilities are recorded in
the balance sheet as a result of such agreement. When the firm decides to borrow,
the lenders are shown a clean balance sheet, increasing the chances of credit
approval.
DISADVANTAGES OF LEASING
1. It is more costly than if the firm has purchased the asset;
2. The benefits of depreciation, investment, tax credits, and salvage value are not availed of
by the lessee; and
3. Even if the firm can abandon unprofitable operations, it cannot abandon the lease
payments.
WHEN LEASE FINANCING MAY BE UTILIZED

1. There must be cost savings over borrowing;
2. It must be available where an equivalent amount of debt financing is not available; or
3. Some offsetting advantage which in the opinion of management justifies its high cost.

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LEASING

Lessor- is the owner of the leased property.

A BRIEF DESCRIPTION OF THREE LEASING COMPANIES

The Financial Lease

The Operating Lease

Sale and Leaseback

BASIC LEASE PROVISIONS

Lessor Bears Ownership Risks

Evasion of Budgetary Restrictions

Cash Made Available for More Profitable Investment

Tax Advantages Over Ownership

Lease Does Not Appear as Debt

WHEN LEASE FINANCING MAY BE UTILIZED

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