Why Not Lease Financing?
Today, however, it is possible to lease virtually any kind of fixed asset.
Firms generally own fixed assets and report them on their balance sheets, but it’s the use of the building and equipment that’s important, not their ownership per se.
One way of obtaining the use of assets is to purchase them, but an alternative is to lease them. Leasing traditionally was generally associated with real estate – land and building. Today, however, it is possible to lease virtually any kind of fixed asset.
Leasing takes three different forms: sale – and –leaseback arrangements, operating leases and straight financial, or capital, leases.
- A Sale and Lease – An arrangement whereby a firm sells land, building, or equipment and simultaneously leases the property back for a specified period under specific terms.
- Operating Lease – A lease under which the Lessor (the owner of the leased property) maintains and finances the property; this is also called a service lease.
- Financial Lease – A lease that does not provide for maintenance service, is not cancelable and is fully amortized over its life; also called a capital lease.
Potential Benefits from Leases Financing.
- Flexibility and conveniences. It is often argued that lease financing is more convenient than other forms of financing because smaller amounts of funds can be raised at lower cost and that lease payment schedules can be made to coincide with cash flows in some case generated by the asset.
- Lack of restrictions. Lease financing require fewer restrictions on the lessee than do debt agreements.
- Avoiding the risk of obsolescence. The lessee is not stocked with the asset if it becomes obsolete.
- Cash outflows pitons. Unlike the cash payment of an asset the lessee is able slow down the use of funds and at the same time can use cash flows and working capital otherwise might spend on the asset.
Very often we forget that it is the economic value of the asset that is important to us and not necessarily its ownership lease financing is an option in maximizing the returns on asset employed.