The important activities of a Leasing Process can be summarized as below:
(1) Lease Selection –
The leasing process starts when the lessee enters into a leasing contract with the lessor.
Lessee approaches the Manufacturers and Suppliers, gathers all details about the required asset (design, specifications, price, installation, warranty, servicing etc.) and then takes a decision on the required asset and the supplier
The lessee then goes to the leasing company or broker (lessor) and a lease agreement is broadly negotiated and finalized between them.
(2) Order, Delivery and payment –
In the next step of leasing process:
The Lessor orders the required asset to the selected manufacturer of asset to be leased on behalf of the lessee.
The manufacturer delivers the asset at the site of the lessee
The lessee inspects the delivery and gives a notice of acceptance to the lessor if he is satisfied with the asset.
(3) Lease contract –
The most important part of the leasing process is the lease contract:
Both the parties sign a lease agreement setting out the details of the terms of contract. It usually ranges from 3 to 5 years.
It may be fully pay out lease or nominal rentals may be charged.
(4) Lease Period –
Regular lease rental are paid by the lessee.
Lessee ensures proper maintenance of asset.
Lessee is entitled to warranties and after sale services from the lessor.
At the end of the lease period the lessee may either renew the lease or terminate it or buy the asset.
(5) Lease Agreement –
The lease agreement consists of all the obligations of the lessor and lessee. It includes:
The basic lease period during which lease is irrevocable
The time and amount of periodic rental payments to be paid
Details of options to renew the asset or purchase it or in absence of such an option the lessor takes the possession of the asset
Details regarding the responsibility of payment of cost of maintenance and repairs, taxes, insurance and other expenses
In a Net Lease Agreement – Lessee pays all the above costs
In a Maintenance lease agreement – Lessor pays all the costs
Advantages of Leasing
To the lessee
It is a simple agreement, free from cumbersome procedures therefore, it saves time and effort.
It helps in financing of capital goods like land, building, machinery etc. with small initial investment.
It acts as an additional source of finance and helps the lessee to expand his business operations
It is a cheaper source of finance than other alternatives
A lease agreement allows for flexibility in rental payments and negotiation of agreement terms at the convenience of the lessee
The lessee receives tax benefits
Risk of Obsolescence of asset is avoided as the lessee has the option the replace the asset with the latest one.
To the Lessor
The lessor is fully secure as in case of default by lessee, the lessor can take back the asset as the ownership lies with him
The lessor can lease assets with high depreciation rate and enjoy tax benefits by way of depreciation
It is a highly profitable business, the lessor usually pays less interest on borrowings than what he charges from the lessee as premium
The ultimate return on initial investment is very high
Disadvantages of Leasing
To the Lessee
He has the right of use only there is no ownership, he cannot make major changes or alterations to the asset
It is a costly option
The lease may be canceled due to poor financial position of the lessee
The lessee losses the residual value of the asset
The lessee losses out on tax benefits due to depreciation and investment benefits if any
The lessee may be subjected to penalties, if he terminates the contract before the expiry of lease period
To the Lessor
The lessor has to bear high risk of obsolesce of asset
The lessor may not be able to charge sufficient rental due to enormous competition in the leasing market
The lessor does not get the advantage of increase in price of asset due to price level changes as he can charge only fixed rentals during the entire lease period
The lessor does not get any subsidies related to the asset as a usual buyer (user) would get
It is a long term investment as the total cost of the asset is covered during the lease period which usually ranges from 3 to 5 years