Page 173 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes 11.3 Financial Aspect

Lease financing enables the lessee to have finance for huge investments in land, building, plant
& machinery etc., up to 100%, without requiring any immediate down payment.

Additional Sources of Funds: Leasing facilitates the acquisition of equipments/assets without
necessary capital outlay and thus has a competitive advantage of mobilizing the scarce financial
resources of the business enterprise. It enhances the working capital position and makes available
the internal accruals for business operations.

Less costly: Leasing as a method of financing is a less costly method than other alternatives
available.
Ownership preserved: Leasing provides finance without diluting the ownership or control of the
promoters. As against it, other modes of long-term finance, e.g. equity or debentures, normally
dilute the ownership of the promoters.
Avoids conditionality: Lease finance is considered preferable to institutional finance, as in the
former case, there are no strings attached. Lease financing is beneficial since it is free from
restrictive covenants and conditionality, such as representation on board etc.
Flexibility in structuring rental: The lease rentals can be structured to accommodate the cash
flow situation of the lessee, making the payment of rentals convenient to him. The lease rentals
are so tailor made that the lessee is bale to pays the rentals from the funds generated from
operations.
Simplicity: A lease finance arrangement is simple to negotiate and free from cumbersome
procedures with faster and simple documentation.
Tax Benefit: By suitable structuring of lease rentals a lot of tax advantages can be derived. If the
lessee is in tax paying position, the rental may be increased to lower his taxable income. The cost
of asset is thus amortized faster to than in a case where it owned by the lessee, since depreciation
is allowable at the prescribed rates.
Obsolescence risk is averted: In a lease arrangement the lessor being the owner bears the risk of
obsolescence and the lessee is always free to replace the asset with latest technology.

A lease agreement offers various advantages to lessor as well. Let us discuss those advantages
one by one.
1. Full Security: The lessor's interest is fully secured since he is always the owner of the
leased asset and can take repossession of the asset in case of default by the lessee.
2. Tax Benefit: The greatest advantage to the lessor is the tax relief by way of depreciation.
3. High Profitability: The leasing business is highly profitable, since the rate of return is
more than what the lessor pays on his borrowings. Also the rate of return is more than in
case of lending finance directly.
4. Trading on Equity: The lessor usually carry out their business with high financial leverage,
depending more on debt fund rather equity.

5. High Growth potential: The leasing industry has a high growth potential. Lease financing
enables the lessee to acquire equipment and machinery even during a period of depression,
since they do not have to invest any capital.

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