Lease financing means such a source of finance, in which finance is obtained not in cash, but in the form of machinery, equipment, and other capital assets. In this source of lease finance, complete ownership of the asset is of the leasing company.
In other words, lease finance is such a process in which the finance seeking company contacts a leasing company, which provides the desired capital assets to the company seeking it, for use during the specified period, by purchasing the assets from the market and in turn, the user company pays rent for use of the assets, during the specified period.
The company availing lease has the right only to use it during the specified period for which the contract has been made, which may be renewed also.
Advantages of Lease Financing
Following are the advantages of lease finance:
- The problem of finance of the entrepreneurs is solved easily by this source.
- The availability of finance by this source is quick because its procedure is not complicated and lengthy like other financial institutions.
- In this source, there is no interference in the management of the company and it may take the decisions freely.
- By availing lease finance, the credit taking the capacity of the institution does not have any adverse effect.
- By this source, inflation does not affect the institution, because lease rent remains the same during the specified period.
- Finance being on the lease, cent percent finance equal to the cost of the assets may be arranged because, in this source, margin money is not required.
- This source is very convenient because this payment is required to be done on the accrual of income.
- By using this source, the company may easily prepare its budget, because lease rent is decided in advance.
Disadvantages of Lease Financing
Following are the disadvantages of lease finance:
- This source is costly because the rent of the lease is normally high.
- The contract of leasing is for a certain period. If the machinery, equipment, and other sources become obsolete, before a specified period, then heavy losses will have to be borne.
- Every institution forms the capital structure, by keeping total project cost, in view. If assets are arranged on the lease, the capital of the company remains unutilized and the company has to bear the unnecessary burden.
- This sources adversely affects secrecy, because the institution obtaining finance has to the leasing company.
- It adversely affects the production process of the company, because, for the repair and maintenance of machinery, dependence is on the leasing company.
Thus, Now you all know the advantages and disadvantages of lease finance.