Overview of Finance Lease

When it comes down to successfully managing a business, no one can say that it is a walk in the park. Not only one has to think a lot before investing a large sum of money, but he/she also has to ensure that all the operations are being done as smoothly as possible.

As we know that lease is a contract between two parties i.e. lender and the buyer, so there is one type of Lease. This type is called financial lease. Sometimes, these financial leases are also known by the name of full-payout rent. Financial leases are, generally and typically, long termed the terms of the contract are not cancellable. In financial rent, the buyer or the lessee is responsible for all expenses of the equipment and machinery that may arise.

Under US accounting standards, a lease can only be regarded as “financial lease” if, firstly, the ownership of the asset should be transferred back to the lessor after the term ends. Secondly, the term should be equal to or exceed the estimated useful life of the asset. Thirdly, the present value of the payment equals or exceeds the original cost of the asset.

It is also noteworthy that industrial equipment manufacturers have this option of leasing out their equipment through indirect mediums e.g. banks. They do not have to directly deal with the lessee. In this way, different manufacturing companies broaden their scope of provision of equipment in the market.

During the equipment rental, reaping the taxation benefits is crucial if one wants to maximize the advantages of the finance rent as a whole. Since the rental payments are, usually, considered a rental expense so it is deduced from the total tax amount one has to pay. Equipment leasing also protects against the highs and lows of the market and eventually from the inflation itself. Since the payment for rent is fixed, it is only subject to change if the lessor desires any. It is necessary that people should be aware of the financial lease in order to solve the problems that arise during the rental period.