• Leasing

    Leasing is a financial process which enables companies to obtain some fixed asset for some specific duration on rent without buying the asset completely. A company may need one asset for short duration like 1-2 years and don’t have money to buy the asset for this short duration. In that case, they prefer taking it on lease for 1- years and giving it back after the use of the asset.

    The lessee is the receiver of the asset and lessor provides the asset on leasing.  The lease period can be of very short duration for operating lease or can be same as the life of the asset for financial lease. Banks and different financial institutions buy different assets and provide them as financial lease to different companies from which they earn the rent and interest over the entire period of the asset. Financial lease is very popular in Aviation industry where operating lease is very popular in manufacturing industry.

    Advantages of Leasing

    • Leasing requires lower funds than purchasing the same asset
    • Leasing is more flexible than buying the asset for short term use
    • Helps for rapid expansion in business without investing much in fixed assets like lands and buildings.
    • Financial lease provides tax benefits as lease payments are considered as expenses

    Disadvantages

    • Lessee has to bear the maintenance cost of the asset
    • Difficult to terminate a lease contract before the end of the lease period specified in the initial contract
    • May result in higher rental at the time of renewal of the lease contract and sometimes it may not be successful.
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