In the current years, the lease financing has come out as one of the most significant sources of long-term financing. In the leasing contracts, the company gains the right to utilize the asset devoid of holding the title to it.

Hence, it is on paper contract between the user of the assets, called “the lessee”, and the owner of the assets, called “the lessor” whereby the lessor allows the lessee to efficiently use the asset for a specific period, but the title of the asset is preserved by the lessor.

This cost-effective utilization of the asset is allowed by the lessor on the imbursement of monthly amount, which is in the form of “lease rent”.

Types of Leases

1.    Financial Lease: In this type of lease, the lessor acts as a financier. Lessee selects the asset and bears the cost of repairs, maintenance, and insurance of the asset. Lessor reserves the right to confiscate the asset in the incident of any non-payment on the part of lessee.

The lessor recovers a major part of the cost of asset by way of lease rent during the lease period; the lessor agrees to transfer the rights of the asset to the lessee by paying a nominal price, which is referred to as “”. This type of lease is also referred to as “capital lease”.

2.    Operating Lease: In this type of lease, the lessee gets a limited right to use the asset. Lessor selects and purchases the asset and leases the same to the lessee. Lessor bears the cost of repairs, maintenance, and insurance of the asset.

Operating lease is for a smaller duration of time and imposes no long-term obligation either on the lessor or on the lessee. The lease rent paid by the lessee does not contain any part towards the cost of the asset. After the lease period is over, the control of the asset reverts to the lessor who can lease out the asset to another party.

3.    Sales and Lease Back: In this type of lease, the lessee purchases the asset of his own choice and then sells the same to the lessor. On the sale of the asset to the lessor, the ownership of the asset gets transferred to the lessor. Lessor then leases out the same asset to the lessee. After this stage, it becomes a routine lease transaction both for the lessor as well as for the lessee.