Overview of leasing

Equipment Leasing is without doubt, the most creative financing alternative of today. It is an imposing industry in terms of scope, size and potentials, as more of the world’s equipment needs are met through this unique form of financing. All over the world, the industry remains a significant force in equipment financing and generates over $1 trillion in new lease volume each year. Leasing is vital for economic growth and poverty reduction. The link between leasing, capital investment and economic growth has been established globally. The conclusion is that leasing stimulates capital investment which in turn promotes economic growth.

Indeed, leasing stimulates capital investment in countries where it is well developed, as leasing enables businesses and even governments (at the local and national levels), to acquire capital assets for production. The acquisition and usage of productive assets leads to productivity, income generation as well as job creation.

The unique attributes of leasing makes it suitable for any developmental model, major economies across the globe have embraced leasing as a strategic anchor for their economic growth and development. For instance, in United States, China, Canada etc lessors are at the forefront of investments in telecommunications, energy, transportation and many other infrastructure needs. In United States, leasing industry generates one third of the external financing for investment in capital equipment.

According to International Finance Corporation, ‘’Leasing has been proven to be an effective financial tool used to achieve rapid economic development. Empirical evidence suggests that every 10 percent growth in leasing activities leads to a corresponding 1 per cent average growth in GDP of a country.  Furthermore, when leasing transactions increase above 1.8 percent of GDP, unemployment rate reduces below 10 percent’’.

 

HOW LEASING WORKS.

Equipment leasing is a contractual agreement between an equipment owner “the lessor” and a user of the equipment the “lessee” whereby the equipment owner gives the user possession and right of usage of the equipment for a specific period of time the user in turn pays periodic fees called rental as compensation for the usage of the equipment.

As a financing mechanism, leasing enables firms, government and individuals to acquire capital asset or equipment. This is achieved through the use of a financier, such as a Bank or an independent leasing company. A firm (or individual), will usually identify the equipment required for its business, as well as the supplier of such equipment. The firm will then apply to a leasing company (or a bank) to make direct and upfront payment to the supplier for the cost of equipment, plus any applicable taxes.

Upon agreement, the leasing company (or bank) will pay the supplier the full cost of equipment, and take legal ownership of the equipment. Through a lease agreement with the firm (the ‘lessee’), the leasing company (or bank) will lease the equipment to the enterprise for a specific period of time (2, 3, or 4 years) in exchange for monthly rental payments, or payments as otherwise agreed. The leasing company (or bank) expects that at the end of the lease period, it will have recovered from the firm (the ‘lessee’) the cost of equipment financed plus desired return.

 

The firm, through leasing, is able to use the equipment for production, and at the same time generate income to pay the monthly rentals to the leasing company (or bank). In another arrangement (operating lease), the leasing company may provide the asset for the lessee without recovering the cost of the equipment but depend on revenue from leasing the asset to other customers or the sale of the asset

 

Source : Independent

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