What Is A Financed Lease?
Marlon Jerez / Consultant in Economics and Financial Issues
Translated by Economic Adviser
The financing of a lease is a compromise between the lessor
and the lessee. The lessee makes payments over a specific period of time
to the lesser on what is leased. This rental compromise may be cancelled
only if both parties agree with the cancellation. If the property rented
is equipment, the duration of the rental is generally equal to the useful
life of the equipment or machinery. Real estate leasing is extended for 20
years or more may corner only a small fraction of the expected life of the
structure. Maintenance and other services are generally not care of by the
lessee under the finance.
Items that are commonly adhered to financed leases: Real
estate, office equipment, medical equipment, railroad cars, air planes and
construction and automobile equipment. If the item that is leased is real
estate, the lessor may be the sole owner of a property or company like a
Brokerage House. An outfit of lessors is commonly a financing or leasing
company or a commercial bank. The common procedure used to lease equipment
is based on the leasing company determining which type of equipment the
leasing company has decided to lease, the establishing of a buy price with
the bank, who buys the item and rents it out for a specific amount that
will provide an adequate return that is adequate with the lessorís
Rental leasing usually allows for the lessee to continue
its stance as the holder of the property even after the initial rent is
completed. This may be permitted with the use of an option to renovate
which permits the one who is renting to obtain a new lease at a specific
amount after the initial lease has expired.
The rented amount is a fixed payment for the lessee, just
like the interest over a debt. Not abiding to the payments may bring
bankruptcy or insolvency. The claims against the lessee by the lessor, in
the case of bankruptcy are less severe than the ones claimed by creditors.
The item leased will be repositioned together with partial payment to the
lessor of the payments owed from the contract.
Maybe what is most noticeable is that the rent involves a
fixed charge similar to interest and therefore the lessee absorbs the
fluctuation in the companyís revenues. In other words, financed leasing,
like debt, involves benefits and dangers.
Which are the benefits that financed leasing offer? There
exist several benefits derived from the utilization of this form of
financing in which the following are the most common:
leasing offers the benefit of being completely deductible while only the
interest in a regular bank loan is deductible.
betters your capital structure since it is not reflected in the financial
statements as a liability and with the use of a financial lease its value
is 100% covered, allowing the lessee to utilize his or her capital for
other commercial purposes.
companies to diversify their portfolio of creditors. Additional costs,
like taxes and others, may be capitalized within the lease and amortized
throughout the time of the duration of the contract.
leasing is also a tool that helps obtain up to date technology while
avoiding the equipment to become obsolete.
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