14 Different Types of Lease You Need to Know!!!
Leasing has become the most accepted settlement in solving the necessity of fixed asset than purchasing the asset. While assessing the investment, the owner of the property must understand thoroughly that if this process is fetching the returns or not?
Purpose of Leasing:
- Benefits of taxes
- Avoid ownership and thereby avoiding risk of ownership.
There are four different things possible post termination of lease agreement:
- The lease is renewed by the lessee for a definite period of time.
- The asset goes back to the lessor.
- The asset comes back to the lessor and he sale it off to a third party.
- Lessor sales assert to the lessee.
A lease is an agreement outlining the terms under which one party accepted to rent the property owned by another party. Leases are classified into various types on the basis of its variation in the terms provided in the lease deed. The most common and popularly listened leases are the:
- Financial lease or Capital Lease
- Operating lease.
There are some other types of lease apart from these. Such as,
- Sale and lease back
- Direct lease
- Single investor lease
- Leveraged and non-leveraged lease
- Domestic lease
- International lease, etc.
A lease is a very important option of financing for an entrepreneur having no or insufficient money for financing the initial investment required for his business. The lessor finances the asset and the lessee uses it in exchange for agreed & fixed lease payments. This type of lease is known as finance lease. There are various types of arrangements for various situations and they have been classified accordingly.
Variation in the terms provided in lease, classifies it into different types. Elements which classifies them are as follows:
- Location of the lessee, lessor and the equipment supplier.
- Involvement of number of parties
- The risk and rewards which are transferred to the lessee
Here, the rewards means the cash flow which is generated by the use of the asset or the equipment and risk means the chance of technological disuse.
Let’s have a look to different types of lease with brief notes on each of them.
Different Types of Lease
01. Financial Lease or Capital Lease
- It is a lease which involves payment for a longer period of time.
- The amount paid to the lessor by the lessee is more than the actual cost of the property in the form of lease charges, as it will include interest over a long period of time.
- All the costs are borne by the lessee and the lessor does not render any service.
02. Operating Lease
- In this lease, there is a use of an asset or property for a specific period of time usually for a short duration.
- In this lease, all the expenses are borne by the lessor and he will not be able to realize the full cost of the property.
- The lessor bears the risks of non-use of the asset and incident-related risk.
- This type of lease is preferred when the asset, property or equipment is likely to be remain unused for a longer period of time.
- From both the parties, either party has the option to terminate the lease after giving notice.
03. Conveyance Type Lease
- This lease is generally for a longer period of time with an intention of transferring the title of the ownership to the lessee.
04. Leveraged and Non-Leveraged Lease
- There may be situation when the value of the asset which is leased, is quite a huge amount which may be difficult or impossible for the lessor to finance.
- So, in this case the lessor includes one more financier who will also charge over the leased asset.
05. Tax-Oriented Lease
- A lease will be considered as a tax-oriented lease, where the lease is not a loan on security but it qualifies as a lease, for availing some tax benefits to either or both the parts.
06. Non-Payout and Full Lease
- In case of non-payout lease, the same asset is leased over and over again by the lessor due to non-payment. While in case of full lease, the full value of the leased asset is recovered by the lessor by the way of leasing.
07. Sales Aid Lease
- In this type of lease, tie-up arrangement with the manufacturer for marketing is done by the lessor.
08. Net and Non-net Lease
- In case of non-net lease, the insurance of maintenance and other incidental expenses incurred is on account to the lessor.
- While in net lease, there is no concern to the lessor for the above-mentioned issues. The lessor is only confined to financial services.
09. Specialized Service Lease
- Here the asset which is being leased out, the lessor or the asset owner is the specialist of the asset.
- Along with provision of the lease there is also provision of specialized personal service to the user of the asset or property i.e. the lessee.
- This is quite common in case of automobiles, electronic goods, air- conditioners, etc.
10. Cross-Border Lease
- Lease across the national frontiers are known as cross-border lease.
- Shipping, air services, etc. falls under this category of lease.
11. International Lease
- In this lease, the parties involved in the transactions of the lease may belong to the different countries.
- This is quite similar to the cross-border lease.
12. Sale and Leaseback
- In this type of lease, the company which owns the asset or property sells it to the lessor.
- The lessor immediately pays for the asset and the asset is leased out to the seller.
- So, in this case the seller of the asset becomes the lessee of the asset or property.
- The asset remains with the seller who is the lessee but the ownership is now of the lessor who is the buyer.
- This is done so that the finance is available to the selling company for running of the business along with retaining the asset.
13. Import Lease
- In this type of lease, the equipment which is provided on lease by the company may be located in the foreign country, while the lessor and the lessee may belong to the same nation or country.
- The equipment in this case is more or less imported.
- Imported leasing encourages the business in conquering the problem of cash flow by not paying at a time for acquiring the asset.
- For purchasing the asset from abroad, the services of the specialist asset finance company is required for regular rental payments.
14. Commercial Lease
- The commercial lease is an agreement between the landlord and the business for the rental of the property.
- Usually, the businesses prefer renting than to purchasing as it requires least capital. Due to more complications in the commercial agreements than residential one.
- So, it’s always better, before signing the commercial lease, to understand their terms, which normally includes rent amount, rent increases, security deposit, improvements, description of the property and signature etc.
There are different kinds of lease arrangements. It makes sense to consider them all to see which is best suited to your business, your particular circumstances and the asset that you are acquiring.
Summing up, listed above are the different types of lease, which are popular. Expect that the article would have provided you the knowledge about different types of lease. If you think some things have been missed out or you want to share your views regarding this topic, so please do share it with us in the comment box given below.