Lease Financing

This means of financing has developed rapidly in the decades of sixties and seventies. At present this means of financing gained considerable importance due to its wide variety of applications and has gained a substantial increase in the sheer volume of transactions. Although this type of financing can be for long term, most lease financing is for periods of less than ten years. Under the subject of finance our concern is with financial leases rather than with operating leases. Hence we will study here about the financial lease.
A lease is a means by which a firm can acquire the economic use of an asset for a specific period of time. A financial lease is a non canceleable contractual commitment on the part of a lessee to make a series of payments to a lessor for the use of an asset. With the help of financial lease, the lessee requires most of the economic values accruing to the outright ownership of the asset, even though lessor retains title to it. The financial lease period generally corresponds to the economic life of the asset. Further, the total payments the lessee agrees to make will exceed the purchase price of the set.
In the financing, the nature of the obligations of the lessor and the lessee is specified in the lease contract. The contract contains the following provisions.
1. The basic lease period during which the lease is non canceleable.
2. The timing and amount of periodic rental payments during the basic lease period
3. Any option to renew the lease or to purchase the asset at the end of th lease period
4. Provision for the payment of the costs of maintenance and repairs, taxes, insurance and their expenses
Forms of lease financing:
Though there are many forms of lease financing virtually all lease financing arrangements fall into one of the main three categories. These three forms of lease financing are discussed below:
1. Sale and lease back: Under a sale and leaseback