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Unit 11: Leasing and Factoring

11.1 Meaning and Types of Leasing Notes

Leasing is a process by which a firm can obtain the use of a certain fixed assets for which it must pay
a series of contractual, periodic, tax deductible payments. The lessee is the receiver of the services
or the assets under the lease contract and the lessor is the owner of the assets. The relationship
between the tenant and the landlord is called a tenancy, and can be for a fixed or an indefinite
period of time (called the term of the lease). The consideration for the lease is called rent.
Under normal circumstances, an owner of property is at liberty to do what they want with their
property, including destroy it or hand over possession of the property to a tenant. However, if
the owner has surrendered possession to another (i.e. the tenant) then any interference with the
quiet enjoyment of the property by the tenant in lawful possession is unlawful.
A lease contract can be classified on various characteristics in following categories:
1. Finance Lease and Operating Lease
2. Sales & Lease back and Direct Lease

3. Single investor and Leveraged lease
4. Domestic and International lease
Let us understand them one by one.
1. Finance Lease: A Finance lease is mainly an agreement for just financing the equipment/
asset, through a lease agreement. The owner lessor transfers to lessee substantially all the
risks and rewards incidental to the ownership of the assets (except for the title of the asset).
In such leases, the lessor is only a financier and is usually not interested in the assets. These
leases are also called "Full Payout Lease" as they enable a lessor to recover his investment
in the lease and derive a profit. Finance lease are mainly done for such equipment/assets
where its full useful/economic life is normally utilized by one user - i.e. Ships, aircrafts,
wagons etc.
Generally a finance lease agreement comes with an option to transfer of ownership to
lessee at the end of the lease period.
Normally lease period is the major part of economic life of the asset.
2. Operating Lease: An operating lease is one in which the lessor does not transfer all risks
and rewards incidental to the ownership of the asset and the cost of the asset is not fully
amortized during the primary lease period. The operating lease is normally for such
assets which can be used by different users without major modification to it. The lessor
provides all the services associated with the assets, and the rental includes charges for
these services. The lessor is interested in ownership of asset/equipment as it can be lent to
various users, during its economic life.

Example:
 Earth moving equipments,

 mobile cranes,
 computers,
 automobiles, etc.
3. Sale and Lease Back: In this type of lease, the owner of an equipment/asset sells it to a
leasing company (lessor) which leases it back to the owner (lessee).

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