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What Is A Financed Lease?  

Marlon Jerez / Consultant in Economics and Financial Issues
Translated by Economic Adviser
Soraya Nasrallah
 

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 investment.  

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:  

1.      Financed leasing offers the benefit of being completely deductible while only the interest in a regular bank loan is deductible.

2.      It 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.

3.      Allows 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.

4.      Financed leasing is also a tool that helps obtain up to date technology while avoiding the equipment to become obsolete.

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